2022 Midyear China Equity Outlook: Valuations Are Attractive Again

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  • We are cautiously optimistic about China equities into the second half and beyond, with current valuations offering reasonably attractive opportunities.
  • The property sector, an economic pillar that had been under pressure even before the last Covid outbreak, has yet to stabilize.
  • China’s underlying secular trends, such as digitalization, ESG-related imperatives, and rising middle-class consumption remain strong economic drivers.
2022 Midyear China Equity Outlook: Valuations Are Attractive Again

The lifting of the lockdowns in parts of China has raised hopes of a corresponding rebound in consumer sentiment and capital expenditures. For now, as the economy emerges from its latest Covid battle, companies are making downward earnings revisions and providing cautious guidance in the short term. We believe businesses and investors are closely watching the trajectory of the pandemic in China along with government measures.

The property sector, an economic pillar that had been under pressure even before the last Covid outbreak, has yet to stabilize. Despite recent supportive policies, demand remains lackluster, partly due to rising unemployment and reduced income growth following the outbreak. As a result, developers’ funding, construction activities, demand, and price momentum continue to be tested. Therefore, we believe policy support will accelerate for the rest of the year to lift the sector. Recently, the government has cut the loan prime rate and mortgage rate and announced increased investment in infrastructure, among other supportive measures.

The market has been trying to find a bottom -- valuations have been close to minus one standard deviation of the long-term average level in recent months. In addition, over the past four months (as of 9 June 2022), the market has been largely range-bound despite significant negative earnings revisions. This suggests that valuations are getting supportive and the market has priced in headwinds such as regulatory reforms, Covid disruptions, and the property slowdown.

Position for mid- to long-term recovery

We are cautiously optimistic about China equities into the second half and beyond. Current valuations offer reasonably attractive opportunities despite challenges to find the bottom of the market. Hence, investors could look beyond the near-term uncertainties and position for mid- to long-term recovery. That said, however, we do not expect China equities to rebound back to the valuations seen at the beginning of 2021, as the Covid outbreak may have structurally changed China’s growth trajectory.

Current Valuations Present Attractive Opportunities

Current Valuations Present Attractive Opportunities 1
Current Valuations Present Attractive Opportunities 2

Source: MSCI as of May 31,2022. For illustrative purposes only. Past performance is not indicative of future results.

While certain triggers like rising inflation, geopolitical concerns and Fed tightening continue to keep the investors cautious, China’s potential relaxation of COVID policies, or even reopening, may help ease the selling pressure that we saw earlier this year. We believe investors should not lose sight of the underlying secular trends that could drive future earnings, such as digitalization, ESG-related imperatives, and rising middle-class consumption.


For more investment insights, visit our 2022 Midyear Investment Outlook.


Disclosure

Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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