An increasing number of global banks are expressing caution with regards to investing in China, including Credit Suisse which expects the ongoing crackdown to continue and dented market sentiments to prolong.
Credit Suisse is currently slightly underweight on China due in part to an ongoing crackdown – most notably in the mainland’s technology sector – and there is no expectation of a reversal in sight.
According to the bank’s APAC chief investment officer John Woods, the anti-monopoly focus has been driven by widening income disparity fuelled by rapid expansion in the last two decades.
«I think there’s a probably political overlay as well to this and my sense is that this is going to continue,» Woods said in a virtual media briefing attended by finews.asia. «I do read and I have some sympathy for this view that the two sessions in March next year may provide some clarity. I suspect, though, it will not engender anything close to a U-turn in government policy.»
Rebound in Sight
Despite the caution, Credit Suisse believes that a rebound is in sight with expectations for more regulatory clarity in the first quarter of 2022.
The bank is particularly positive on areas supported by government policy and it is advising investments in a sustainable China – such as renewables or electric vehicles – as one of its top 10 investments themes for 2022.
«We thus continue to recommend focusing on sectors and themes that are aligned with the government’s objectives,» Woods said, highlighting related sectors such as semiconductors, renewables and, more broadly, the energy transition. «Our 'Sustainable China' theme fits the bill and has continued to deliver healthy returns, despite already having rallied more than 50 percent year-to-date.»
Foreign Capital Shift
Nonetheless, more pressure should be expected in the near term including a shift in investor sentiments.
«In terms of the negative operating environment in China, I suspect it will continue. The broad tenets of internal circulation are all about self-sufficiency and domestic consumption,» he explained.
«And with this common prosperity overlay, the focus and preference for foreign capital that there once was [is not there]. That’s not to say that foreign capital is not welcome but I think the tone, the tenor and the tilt have changed somewhat in the last year and I think that will be an enduring feature that foreign investors will focus on in the years ahead.»
Growth Slowdown
Regulators and investors aside, Credit Suisse also highlights slowing growth in China as a reason to stay cautious.
Four out of the bank’s five key indicators for decision-making on Chinese equities, which cover areas like manufacturing and markets data, are not positive resulting in its slight underweight for the broader market.
«Absolute caution and careful sector selection is the watchword for investors in China,» Woods added.
