Asian equities mid-year outlook: On the road to recovery
Find out why Asia is on the road to recovery and why the region can weather any potential macroeconomic headwinds in Invesco’s mid-year outlook.
19 July 2022
Chinese equities had a bumpy ride since the start of the year as concerns over COVID-related lockdowns could dampen the domestic economy. Externally, inflation and rate hikes in western countries also led to weaker sentiment.
However, with the easing in domestic COVID restrictions, improvement in economic data and the easy monetary bias, Chinese equities have recently rebounded and outperformed global peers. We believe that, with the emerging of these catalysts, Chinese equities may see a sustained rebound especially with a relatively attractive valuation against peers.
Chinese policy makers have opted for an easing bias, contrary to the tightening measures by other major economies. While the Fed has started to hike interest rate, China, on the other hand, has cut its lending rate and lowered banks’ reserve requirement ratios.
Inflation has become a primary concern in developed markets, with US inflation reaching 8.6% in May, a 40-year high, and still showing no sign of cooling down. In China, inflation is currently at 2.1%.
With regard to the current global monetary tightening backdrop, historically Chinese equity's performance was mixed. This is different from the view that China will deliver negatively in a rising US interest rate environment.
Chinese equity's performance is less correlated to the rest of the world. First, most of the participants are domestic players for onshore Chinese equities, and foreign participation is around 3% of total market capitalization.
Second, China's policy cycle and dynamics often differ from the rest of the world. For example, at this time, China is going through an easing policy cycle compared to tightening bias for the rest of the world.
China's zero COVID policy has successfully combated the pandemic since the outbreak in 2020. The authorities have reiterated the stance to adhere to the policy.
While China's COVID situation continues to improve, and we have seen the easing of knockdown in Shanghai recently, there are still risks of full or partial knockdown, given the highly infectious nature of Omicron.
We believe that domestic affairs and policies will matter significantly more for China's economic growth compared with external events. China is a huge domestic market and is in an excellent position to withstand external shocks.
Chinese authorities have reiterated their stance to support growth, domestic recovery and employment this year.
Chinese equities are currently at an attractive level, trading at 10.6x for 12-month forward P/E and towards the low end (over -1 standard deviation) of its five-year average range. The PER valuations discount compared to US equities is also high at 40%.
Although US equities corrected YTD and retraced down to 17.8x, it is still at the upper quartile of their historical range, with more downside risk.
Find out why Asia is on the road to recovery and why the region can weather any potential macroeconomic headwinds in Invesco’s mid-year outlook.
19 July 2022
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