Will the Year of the Tiger bring prosperity for China and its investors? There are tentative signs that the tide is turning.
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Investors will be hoping the year of the Tiger brings better times for Chinese stock markets
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The government is taking action to try and boost economic growth and preserve ‘common prosperity’
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The stock market has diversified opportunities for active investors
The year of the Ox did not deliver on its aim of wealth and stability for investors in China. They will be hoping that the Tiger may prove a more auspicious guide in 2022, with its associations of strength and dynamism. There are already tentative signs that the tide is turning.
The Chinese economy has faced a number of headwinds in the past 12 months. The Chinese government took steps to calm the real estate market, which led to high profile difficulties for over-indebted property groups such as Evergrande. It also intervened in the internet and online education sectors, which damaged the business model for many of the country’s largest companies. At the same time, the government persisted with its zero Covid policy, which acted as a brake on growth.
These interventions have undoubtedly been painful in the short term but are part of a broader plan that may ultimately help boost the economy. The government’s pursuit of ‘common prosperity’ is designed to create a higher quality economy without the imbalances that have built up in some developed economies. The government hopes to ensure a level playing field for innovation, rather than a number of dominant companies crowding out smaller businesses.
In the real estate market, for example, the government delivered the message that property is for housing and not for speculation. Property is a large sector and the clampdown hurt, but its long-term effect should be positive. The move to tackle the social and privacy concerns on internet stocks is important – and is also being pursued by Western governments – but has come more abruptly than investors might have hoped.
Taking action
Perhaps most importantly, the government is aware of the economic slowdown created by these policies and is taking action to reverse its impact. Common prosperity remains a secondary consideration to the long-term economic advancement of the country. In its most recent set of five-year plans, the government said it wanted to bring per capita GDP to the level of a “moderately developed” economy by 2035. This means delivering average nominal growth of more than 6% in dollar terms each year.
With this in mind, the government has taken action to stimulate the economy through monetary easing. There may also be fiscal spending coming down the road should the recent loss of momentum persist. China is not facing the same inflationary challenges as many developed markets, so has more room to manoeuvre.
2021 may have been a painful year, but the long-term growth story for China remains intact. Its citizens are becoming wealthier and spending more. This year could bring a different style of growth, less reliant on exports but higher in quality, leaving the country more self-sufficient.
What does this mean for markets?
Markets had a tough time last year. The Chinese government hit internet stocks such as Alibaba and TenCent particularly hard. These form a large part of the index (around one-fifth in those two names alone). This meant the performance of indices such as the MSCI China was weak.
Nevertheless, there have been pockets of strength. Active managers in the right space have been able to find opportunities in growing areas. Across our abrdn investment trust portfolios, we have focused on areas such as aspirational spending, digitalisation, going green, health and wealth, where we have seen growth in the past. These areas have been able to transcend economic weakness and many are aligned with significant government initiatives such as energy transition and technological progress.
Market volatility has also seen some opportunities emerge in unloved areas. The worst may now be over for some of the internet giants, yet share prices have continued to fall. Many strong property companies have been hit along with weaker names. This has seen real value emerge. At the same time, the recent rotation from growth to value has left some high quality companies in areas such as semiconductors trading at more compelling prices.
New opportunities continue to emerge. The Chinese government has committed to increasing research and development (R&D) investment by 7% each year. This is bringing innovation in areas such as artificial intelligence, biotechnology, quantum computing, and robotics. Ultimately, companies in these areas are finding their way onto the stock market and diversifying the opportunity set for investors.
At a time when the rest of the world faces some major challenges from higher interest rates and inflation, to growing social unrest, China exorcised a number of its demons in 2021. This gives it a platform for a stronger outlook in the years ahead. There may still be volatility ahead – tigers are not pussy cats – but for China, the hard decisions have been taken.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
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