China: 2023 Outlook 

This year may be starting off well for the Chinese market, but it is not starting off well for Mr Xi. People are quietly seething at the rapid pace of reopening, both on account of the lack of psychological and medical preparedness, and also – why go to all the effort of zero-COVID for two years if herd immunity is the only solution in the end?

We have never felt so much lack of trust in the government and also, more quietly, in Mr Xi. He will have a lot to prove this year as he refocuses on the economy. We started the year in the exact opposite direction to January last year, and we expect this year to be a positive one for Chinese stocks. However, this does appear to be the consensus positioning at this point and, having enjoyed the entire rebound in tech stocks since the Politburo meeting, we are trimming or in some cases completely repositioning our positions in favour of longer-term trends in the Chinese economy.

Leaders continue to lead only if they deliver earnings – after a multiple expansion driven recovery, we focus back on quality, long-term companies in sectors of healthcare, industrial automation, and technological and commodity independence. These companies, which are technological leaders in their sectors, will continue to benefit from geopolitical regionalization forces and adverse demographic developments in the Chinese economy.

We will keep our overweight in consumer for the rest of the year as the pent-up demand will unleash itself through areas like travel, apparel, and leisure spending, and some internet companies will take advantage of the increased advertising spend. However, we think consumers will spend less time online and therefore we will continue to hold only the internet companies whose ARPUs are not adversely impacted by time spent online.

We are visiting China for the first time since Jan 2020 next month, and a key focus of our due diligence will be understanding how consumer patterns have changed since COVID, as well as the developing property situation on the ground. It is likely that China will have an outsized consumer recovery this year, but the rapidly deteriorating export situation, despite supply chain normalization, will require more than consumer recovery to achieve the bullish 5.7% GDP growth that many are anticipating. After all, consumer sentiment is also heavily impacted by property prices.

Ultimately, Chinese multiples are still very cheap and many companies emerge from the last two years with a more benign competitive environment and accelerating top-line as China re-opens. We think the risk-reward looks more favourable for mid- and small-caps who have survived and will continue repositioning our portfolio for longer-term, earnings led share price performance.