Best Private Bank — Equity Advisory

The last 12 months have been volatile for investors in China, from the meltdown in the high-yield bond sector to regulatory actions targeting sectors such as technology. How are you advising clients to invest in the world’s second-biggest economy in 2022?

Benjamin Cavalli, head of Wealth Management Asia Pacific, Credit Suisse We believe it is still too early to buy into China. We need to see concrete signs of economic recovery and policy easing. While the 50 bp RRR cut in December does represent an easing of the stringent policy stance thus far, a genuine recovery in Chinese risk assets will require a fairly forceful policy shift.

It remains to be seen if this will indeed come to pass. The risk from pressure in the property sector has not yet abated. At the same time, regulatory pressure in the technology sector remains. We have yet to see forward earnings revised higher, regulatory uncertainty fade, or funds flows return. As such, we do not think that there is sufficient justification to increase our exposure to Chinese equities at this juncture.

We prefer investing into Sustainable China and other policy-supported sectors while maintaining a strategic allocation in Chinese equities.

Kwang Kam Shing, CEO of J.P. Morgan Private Bank Asia China is going through a number of structural changes to re-orient its growth drivers, away from the housing market and energy-intensive traditional manufacturing sectors, to higher value-add manufacturing, innovation, as well as domestic consumption.

We believe the long term direction is right and therefore are still constructive on the long term return opportunities in the economy. Nonetheless, it will take time for the economy, businesses and financial markets to adjust.

In 2022, we are positive on China Onshore equities (A-shares) as they provide more exposure to policy beneficiaries – including electric vehicle battery supply chains, clean tech supply chains, semiconductor localisation companies, as well as small and medium enterprises that benefit from common prosperity-related support. We are constructive too on China government bonds but more cautious on high-yield USD credit bonds

We remain cautious on China Offshore until we see more tangible signs of regulatory clarity that will help ease sentiment for offshore equities. Bhaskar Laxminarayan, CIO and head investment management APAC, Bank Julius Baer China is in transition mode, and that has certain implications for investors. While the long term opportunity remains valid due to the scale and importance of China in world economics, the near term is likely to be clouded by policy stances. While there are signs of moderation the winners from the new growth trajectory in China will need some more investor buy-in time.

Jean Chia, CIO and head of Portfolio Management and Research Office, Bank of Singapore. For China, we prefer the onshore A-share market vs. offshore counterparts and advocate a strategy to buy beneficiaries of policy support (such as renewables, new energy, technology and domestic consumption), as well as companies that are cash flow generators and dividend payers.

Andy Chai, Asia CEO, Bank J. Safra Sarasin We believe the Chinese government will try to avoid a hard landing for the economy, hence we expect it to deliver a timely monetary and fiscal stimulus. An increase in local government borrowing to support public sector investment projects, such as on infrastructure, or a reduction in the minimum reserve rate for commercial banks are two options that we think are likely to be deployed to stimulate the economy. This would pave the way for a rebound in the Chinese economy from 2Q22 onwards.

In general, we expect China’s economic recovery next year to provide some tailwind to emerging markets fixed-income assets. Credit spreads of hard currency and corporate bonds are in line with the long-term average. At the same time, foreign trade positions are robust in most emerging markets and we expect low default rates for corporate bonds. The largest risk factor in 2022 is a rapid rise in US sovereign bond yields. Government bonds in local currency are likely to remain volatile in the months ahead. Inflation in emerging markets will keep rising. We expect central banks to implement further rate hikes of significant magnitude. While this should initially impair the performance of local currency bonds, they will become more attractive in the medium term thanks to their higher yields. As a result, we expect very favourable entry points this year.

Jasmine Duan, investment strategist, RBC Wealth Management – Asia China’s zero tolerance policy on COVID-19, declining property prices, and a flexible and accommodative central bank all make it stand out compared to its Western counterparts.

While valuations have become attractive, we would hold off adding to China equities at the moment due to challenges such as the COVID-19 resurgence, economic slowdown and property market turmoil. An opportunity to add to exposure is likely to emerge after 1Q22, when investors see signs that this round of COVID-19 outbreak starts to recede and have clearer ideas of the earnings impact from the recent macro and policy changes. When the time comes, we would look at opportunities benefiting from secular growth trends, such as electric vehicles, renewables and advanced manufacturing.

We believe the volatility in the China bond market that began in 2021 — due to efforts to step up economic reforms — has a high likelihood of persisting into 2022 as policies remain uncertain across sectors. In particular, the deleveraging campaign focusing on the property sector has led to high volatility as it makes it difficult for corporates to refinance. Unlike previous cycles where the government fine-tuned its policies after a gradual correction started, to date, it has refused to alter its policy. The delay in policy response from the government has added volatility to China’s property developers as refinancing is becoming increasingly difficult. Until the government softens its policy significantly, we believe investors should exercise caution when investing in the sector.

Arnaud Tellier, CEO Asia Pacific, BNP Paribas WM China’s economy weakened in 2021 due to the property downturn, COVID-19 restrictions affecting consumption growth, and regulatory pressures. The Central Economic Work Council and Politburo meetings in December 2021 have resulted in a focus on economic stability rather than deleveraging. It was stated that fiscal policy will be front-loaded, including boosting infrastructure spending.

China is the only major economy loosening not tightening policy in 2022. The government has pledged to cut fees and taxes with a combination of fiscal incentives.

We are starting to see signs of outperformance in the most beaten down areas — such as Hong Kong equities +5% year-to-date and the MSCI China.

We are positive on China equities thanks to the improving credit impulse, which historically has been positive for markets. We prefer domestic China A-shares as they would benefit directly from policy easing.

Hong Kong-listed Chinese equities could see a gradual reversion to the mean this year because of their cheap valuations and below average global investor positioning. However, a sustained rally would require more positive catalysts, such as more clarity on regulations and upward earnings revisions. A hawkish Fed and stronger dollar could be headwinds and trigger volatility in the short-term.

The biggest uncertainty is pandemic-related restrictions amid China’s “zero-COVID” policy. Positive surprises would be larger-than-expected policy loosening, signs of regulatory relaxation on the internet and property sectors and a resolution on the ADR de-listing issue.

Opportunities will develop for broader China and Hong Kong equities and selected China bonds where yields are attractive for patient investors in 2022, especially as valuations remain alluring. We believe that the policy will finally turn into a positive catalyst.

Tee Fong Seng, CEO AsiaPacific, Pictet Wealth Management Two of our investment themes for 2022 directly take this into account:

China and the US are treading increasingly divergent paths, whether in terms of monetary policy, COVID-19 or growth momentum. Depending on how the growth slowdown pans out in China, we see potential for the relative performance of ASEAN equities to improve. Undervalued ASEAN stocks represent a way to play attempts to revive Chinese growth, without taking direct exposure to China. In the longer run, they could benefit from the ongoing relocation of major manufacturing facilities away from China. Meanwhile, the Chinese economy is going through considerable upheaval, with overleveraged real-estate companies in the line of fire. How things play out will have implications for domestic consumption. In effect, construction and property-related activity account for a high share of Chinese GDP (close to 30% by some estimates) and housing-related spending for a much bigger percentage of personal consumption than in the US. We believe the sector is ‘too big to fail’, with signs the authorities are subtly moving to contain damage from the problems incurred at the most highly indebted real-estate companies. Noticeable, however, has been the lack of contagion from Chinese high-yield to the rest of the Asian credit complex. We continue to see potential for superior risk-adjusted returns in Asian credit, particularly investment-grade.

Amy Lo, co-head of Wealth Management Asia Pacific, head and CEO of UBS Hong Kong, and a Group managing director at UBS We work with clients to unlock their needs and opportunities and provide advice on the big things that we should look at. We believe China looks poised to rebound in 2022 and see mid-teen percentage [growth] for MSCI China upside in the year ahead.

China’s GDP is likely to grow by around 5% in 2022, with a soft 1H22 and a strong 2H22. Policy easing could step up in view of the downward economic pressure.

With China pledging to achieve net-zero carbon emission by 2060, as well as emphasising green and low-carbon development in its 14th Five-Year Plan, we are seeing meaningful trends in the Greater China capital markets.

Structurally, our preferred themes are: global greentech, for which China and Japan are major players; Asia healthtech, especially telemedicine; 5G, where we see upside even after 2021’s strength; and the “ABCs of tech” (artificial intelligence, big data, cybersecurity), which we think will be one of the key tech themes in the years ahead.

The next big thing for this decade will be the “ABCs of technologies”. For example, we expect the market for AI services and hardware to grow 20% a year to reach US$90 billion by 2025 or even exceed our expectations. Meanwhile, big data is said now to be the new oil. We expect the global data universe to expand more than tenfold from 2020 to 2030. Finally, we expect the cybersecurity industry to grow by an average of 10% during 2020–25, thanks to steadily higher enterprise IT spending and the stronger adoption of cloud security. Raymond Ang, global head, Affluent Clients, Standard Chartered Bank We have to balance the rising structural importance of the Chinese economy and asset markets for investors on the one hand and the outlook for slower economic growth and increased regulatory scrutiny on the other. The way we achieve this balance is by looking for areas of the economy which are key priorities for the authorities and by trying to identify areas/sectors that are attractively priced.

In the current environment, we have two key themes relating to China.

First, our China Common Prosperity theme focuses on three major areas of the economy that we expect to benefit from significant tailwinds – high tech manufacturing, green energy and the internet consumer tech sector.

The second key area of focus is Asia highyield bonds. While regulatory scrutiny of the property sector is likely here to stay, we believe the risks are now priced in and we see elevated yields as attractive to long-term investors.

Michael Blake, Asia CEO, Union Bancaire Privée We believe that China’s ongoing economic transformation will offer long-term opportunities for international investors. We anticipate that improved visibility on the regulatory front and targeted policy support will provide some cyclical reprieve for Chinese asset classes in 2022. We are therefore advising clients to remain highly selective, with a preference for onshore over offshore equities.

Investors can benefit too from exposure to a number of sectors and themes that will be of strategic importance under the “Common Prosperity” drive. These include core innovation and companies with a focus on domestic consumption, a view we have held since the announcement of the 14th Five-Year Plan in March 2021.