Union Bancaire Privée advised investors to exit Chinese markets in mid-2021 and it believes that it may still be too early to re-add exposure to the second-largest economy, preferring to wait for policy support to first take form in early 2022.
According to UBP, a «timely exit» from Chinese equity and bold holdings in the second quarter this year, alongside a focus on quality earnings, supported portfolio returns through the summer. And while some are calling for a return, it is advocating investors to remain cautious for the time being.
«We are definitely seeing a bit of change in the tone around Chinese investments,» said UBP’s Asia senior economist Carlos Casanova in a recent virtual roundtable, highlighting a shift from soured sentiments in mid-2021 to a recent rebound in appetite, especially from U.S. fund managers.
«In our opinion […] it remains potentially a little bit early to call the bottom for the market as a whole.»
Policy Support
Casanova notes that policy support will likely be the main driving factor to help form the floor for Chinese equities, with easing in areas such as monetary policy in the form of recent bank reserve requirement ratio cuts.
In the same vein, he advises investors to be aligned with such policies when reentering in areas such as core technology or domestic consumption.
Traditional Tech Run Over?
Casanova also points out that while there is ample diversity within the Chinese equities universe, earnings from traditional tech giants – established blue chips from consumer-oriented sectors like e-commerce, social media or superapps – aren’t likely to mirror the past.
«Unfortunately, that earnings narrative is not going to be as strong as it has been in the past decade because they are also more mature sectors,» he explained.
China Risk: First Inquiry in 10 Years
Clients are increasingly making inquiries about how to position themselves for the Chinese market and global banks ranging from pure-plays like Pictet to universal giants like HSBC also advising investors to take a wait-and-see approach for now.
In fact, UBP’s chief investment officer Norman Villamin notes that even the doubt itself about the market has been a rare phenomenon.
«I have been in Europe now for about 10 years and in my 10 years, to be honest, I've never had anybody ask me about the risk of China […] and this is the first year that has happened,» Villamin said, having spent six years of that last decade in Zurich with UBP.
In 2022, he underlined continued elevated risks for China, in particular, with regards to policymaking not only in the country itself but also in the U.S. where negative ripples could be caused, for example, by excessive Fed tightening.
