Chinese market sentiment is increasingly improving due to reopening hopes and other tailwinds but Pictet warns against premature optimism, urging investors to await earnings and economic figures instead of taking the risk of timing an early entry.
After a difficult start to the year for Chinese markets, sentiments have recently been improving driven by reopening hopes, positive policy signals for the internet sector as well as monetary and fiscal stimulus.
But even if markets and the economy have bottomed, the path to a rebound remains uncertain.
«With Shanghai already gradually opening its entire city, we think the worst period of time is probably behind us. But the recovery ahead will possibly be a lot more gradual and slower than what happened back in 2020,» according to Pictet Wealth Management’s head of Asia macroeconomics research Dong Chen in a recent virtual webinar attended by finews.asia.
«This is because in many places, as far as we know, some sort of restrictions are still in place. In Shenzhen and Shanghai, for example, people are required to conduct regular and frequent PCR tests in order to move in public places and this could actually put constraints on the pace of recovery. This will not likely be a V-shaped recovery.»
GDP Downgrade
As a result, Pictet has recently revised its annual China GDP forecast downwards – not unlike its banking peers – from 4.5 percent to 4 percent, well below Beijing’s previously announced target of 5.5 percent.
In addition to Covid and lockdown-related challenges, Chen underlined continued troubles in the local real estate market.
«The Chinese property sector will probably continue to be difficult despite all the recent supportive policies,» Chen explained. «This is because we are seeing that from a long-term structural perspective, the high-growth period for housing is probably already over and so demand won’t be strong as before. At the same time, many developers are still facing a lot of stress in terms of financing.»
Visibility Before Entry
To that end, Pictet is advising to exercise caution against attempting to time an early entry, but instead to wait for the release of second-quarter earnings and economic figures for more visibility.
While historically attractive valuations coupled with positive policy signs in the internet sector have allowed sentiment alone to fuel a slight market rebound, Pictet Wealth Management’s Asia chief investment officer Alexandre Tavazzi underlines that this may not be sufficient to drive a sustainable upward movement in the longer term.
«Whether you want to go full in into Chinese equities from here is more difficult because you have to get the Q2 earnings and GDP numbers. As we know, this was precisely when we had the largest impact from the Covid lockdown measures,» Tavazzi said. «Obviously, the second half is going to be better than the first half but the question is a matter of the magnitude.»
Not Writing Off China
Nonetheless, Pictet stressed that it has not adopted a long-term bearish stance on Chinese equities and has been waiting for an improved environment.
«A lot of people have just written off Chinese equities. We were never in that camp. We say that when the conditions are met, we will go back in. Right now, as we speak, we are looking at those numbers in-depth,» Tavazzi added.
«China is the one question we have to get right in 2022. We’ve been out of Chinese equities in our asset allocation since February of last year and we are looking at the situation very, very closely.»
