Chinese cyclical recovery still underway

Oksana Patron

20 June 2023

Although the peak optimism for China was in early 2023, global investment manager Ninety One has said a robust Chinese cyclical recovery was still underway, meaning there will be opportunities to invest.

According to the firm’s strategist, Sahil Mahtani, investors have started to worry again about allocations to China but this was, in fact, a ‘classic error’ often displayed by investors at the early stages of a cyclical recovery in China.

“Investors were similarly pessimistic in mid-2012, mid-2016, and mid-2019, worrying about debts, or the property cycle, or about demographics,” he said.

“However, that did not stop Chinese equities from staging a powerful rally from 2016 to 2017. Last year China’s real output was 1.5x the size it was in 2016. None of this is to say China’s structural challenges aren’t real; investors need to think about those long-term challenges. But in the short term what will matter for markets is the course of the cyclical recovery.”

Mahtani also said that fund managers went from exceptionally bearish to exceptionally bullish on China in the span of about twelve months.

He added that China’s stalling recovery was easily explainable and the slowdown in the growth momentum in April and May was due to policy support which was prematurely withdrawn and not because of policymakers being “insufficiently committed” to easing but because they were probably overconfident about the strength of the recovery on one hand, and worried about the risks of a debt build up on the other.

When it comes to geopolitical risks, Mahtani warned against not drawing “easy parallels between Russia and China”, and he pointed to the many differences between the two countries, which included China being a rising power, contrary to Russia’s declining influence, with an economy “deeply integrated into Western production processes”.

“Regardless, the key question for the next 12 months is whether the US-China relationship is getting worse or better–at least three high-level US-China meetings in May 2023 suggest the possibility that things are improving,” Mahtani concluded

“Philosophically, as investors what we are trying to do is invest in assets with macro tailwinds and invest against those with macro headwinds, and crucially to allocate to those ideas countercyclically. Markets overindex to short-term noise and focus on past data. We try to do the opposite. Nowhere are the opportunities greater to do this today than in China.”