Full Speed in the Year Reset by the Rabbit

Financial Newswire Contributor

15 February 2023

Premium Asia Funds Management’s chief investment specialist, Jonathan Wu argues that his generation has a new aphorism: “When China grows strongly the rest of the world prospers”.   It is our contention that China and its Covid and Economic “reset”, which is and will be underpinning much of Asia, is going to be the story of 2023 and into 2024.

What do we meant by the “reset”?  We see a few key drivers:

Covid Policy shift

Firstly, a Covid Policy shift is opening up the country.  As China loosens its strict epidemic prevention policies, China’s restart is expected to boost global economic growth, and we expect that China’s economic growth will become stronger than recent trends. We reflect on the fact that China’s economic challenges are different to the West, as they are not the result of high inflation, but flow from a zero-COVID policy which paralleled a deliberate slowdown of property which historically has been a material contribution to GDP growth. Both will improve.  After Chinese New Year, we see economic activities largely back to BAU.

In fact, if you examine the Baidu’s (China’s version of Google) Migration Index which looks at mobility data of Chinese citizens over recent years, you will see there is evidence of what is known as “revenge spending”. These are at levels well ahead of even Pre-COVID 2019.

The overall reset will provide a major structural boost to domestic consumption and private investor sentiment.

Economic support from the Chinese Government

Second is economic support from President Xi Jinping’s government.  China separates itself from almost all major economies with its low levels of inflation and is able to, and in the process of, implementing accommodative monetary and fiscal policies to underpin economic growth.  Over the next year or two we are confident that CCP policymakers will continue a focus on boosting and reviving the economy.  Why do we think this? Well given the fact that the politburo was almost all changed in late 2022, these new members of the senior cabinet do in fact need to prove their worth in maintaining and growing the economy. A consensus is emerging that China will in particular be investing in longer-term areas such as innovation, infrastructure and likely green technologies.

Professor Tim Congdon from the International Monetary Policy Institute expressed a similar view in a recent interview:

“There have also been astonishing announcements about future policy from China in the last few weeks, which almost amount to a complete reversal of what was going on for most of Xi Jinping’s period as the leader of China. We’re just speculating about what they really mean, but they seem to indicate a move back towards opening up the economy towards more friendship with the West. But I think a fair verdict is that China will actually have above-trend growth in 2023. Trend growth may have fallen sharply down to, say, 3% or 4% a year, not like the old 10% plus we had in the hyper-growth period for China. But Chinese developments will be positive for world economy in 2023, unlike what’s going on in the main Western economies, which are struggling with inflation.”

He also mentioned that the Chinese share market has been severely undervalued. We concur.

Better sentiment from and towards China

Thirdly, we expect a potential for a better global sentiment regarding Asia and China.

If Xi Jinping and his government have more focus on growth and keeping people happy, then he and the government will be less reactive to what the West is doing.

“In the short term, maybe those US China frictions and the chance of those spiralling out of control has reduced a bit. The Americans are still going to needle them but I think the Chinese are probably turning the other cheek for a while until growth gets to a more trending level”, says Mark Matthews of Julius Bauer.

It is our view that a reduction in geopolitical risk would be very welcome to the investing community but especially to markets post 2021 and 22.

Perhaps a sign of this is a roughly 20% increase in foreign direct investment in China seen in 2022.

China remains a wonderful hunting ground for active managers who can do the on the ground work to identify superior companies and we continue to believe that investors should look past the “big names” to find the winners.   Our own funds have also increased their exposure to the domestic Chinese consumption recovery, investing in areas such as jewellery, catering travel and retail.   The story however is not just about China.

Asia, says Prof. Congdon “is the continent that really matters to the world economy”.  Regionally, we are positive for Asia ex Japan.  Chinese consumer discretionary spending is also helping our Asia ex-Japan fund, and directly supporting much of Asia.  India represents good opportunities with a robust recovery.  Indonesia is a net exporter of energy and will benefit from continuing rises in energy prices.  Vietnam should have strong economic growth this year and countries like Malaysia and Thailand are taking strong steps, as a few examples.

The region has very attractive demographics as well as a rising middle class.  China alone is expecting another 150 million to be added to the ranks of the middle class in the next couple of years.

The Year of the Rabbit is seen to represent wealth and prosperity.  “In terms of money and luck, think of the Year of the Rabbit as a savvy investor, carefully selecting the best stocks to put your money in.” (Chinese Horoscope.org).

The China reset will bring great benefits to China, Asia ex-Japan and as we started with – to the world economy.  Savvy (code for Active when investing in Asia) investors will find that:

• Chinese stocks average P/E ratio is still well below highs and long term averages.
• Throughout Asia-ex Japan are countries with attractive valuations
• Active stock picking with local expertise in inefficient markets represents fertile ground for finding winners.

Resetting China with a covid opening, an accommodating fiscal and monetary policy will enable China to grow strongly and for Asia and the world to prosper.  Savvy investors will be there and will also prosper.