Despite reopening efforts and attractive valuations, Julius Baer urges investors to exercise more patience before making a meaningful entry into the Chinese market.
Although China is accelerating efforts to gradually loosen its Covid-linked restrictions, Julius Baer believes that it is still too early to add exposure to the market and advises investors to monitor the trajectory of the rebound for the time being.
«We are very likely to have seen the trough from the Covid lockdown in April and May. We do expect that as the economy gradually reopens from the previous lockdown […] there will be a fairly strong recovery in the second half of this year,» said Julius Baer China strategist Richard Tang in a recent webinar attended by finews.asia.
«How strong this will be will heavily depend on the stimulus – whether that is fiscal or monetary – but we do think the direction is up, at least cyclically.»
Preferred Sectors
While the bank is advising investors to wait for better timing, it is currently eyeing three key sectors that are expected to be the primary beneficiaries during the rebound and beyond: environment-related sectors like electric vehicles or renewable energy; consumer sectors; and high-end manufacturing.
But regardless of the timing and strength of the recovery, Julius Baer expects the rising tide to lift all boats in China.
«In the very near term, we do think that what has gone down the most will go up a lot regardless of what the fundamentals are,» Tang said, noting that Chinese equity valuations are at historically low levels.
Hong Kong: «Creaming Cheap»
And on the same subject of valuations, Julius Baer underlined a better short-term outlook for Hong Kong, noting that the market’s price-to-book ratio has never been below 1x, even during the Asian financial crisis.
«While China might take a little bit more time, the opportunity in Hong Kong is more real and immediate,» said Julius Baer’s Asia chief investment officer Bhaskar Laxminarayan, calling the valuations «creaming cheap».
Within the Hong Kong market, the bank prefers financials due to the benefits of improved net interest margins from rising interest rates. Globally, the bank’s most preferred market is US equities followed by Swiss equities.
