Easing Covid Restrictions Boost Investors’ Confidence in China — At Least For Now

But in the long run, demographic challenges and power imbalances in Xi’s political group paint a darker picture for investors.

Qilai Shen/Bloomberg<br/>

Qilai Shen/Bloomberg

Global investors’ sentiment on China has picked up now that the government has put an end to the draconian Zero-Covid policy.

In the past year, investors’ negative view on China has been largely attributed to strict quarantine rules that have disrupted economic activity and led to a wave of unprecedented protests. Last week, the Chinese authorities announced new measures that effectively spelled the end of Zero-Covid, a move that has led to a much brighter outlook for investors next year.

“The implementation of the Zero-Covid policy has loosened a lot more quickly than we were expecting,” Gabriela Santos, global market strategist at J.P. Morgan Asset Management, told Institutional Investor on Thursday. “Broadly speaking, you could imagine China being an important source of [consumer] demand in 2023, when there’s a deceleration in the global economy.”

In JPMAM’s 2023 outlook, Santos and her colleagues laid out why investors should be more bullish on China. Besides the relaxation of Covid controls, the recent liquidity and credit injections into the besieged real estate sector will also be a catalyst for the Chinese economy. JPMAM is also optimistic about the “symbolic gestures” China has made toward the U.S. and other nations after Xi Jinping secured his third term as the leader of the country. These moves signal fewer geopolitical uncertainties in the near future, according to the outlook.

The Covid situation in China has needlessly distracted global investors from real investment opportunities, especially in the energy transition sector, argues Jeff Everett, co-founder of Tectonic Investors. “I think investors are caught in this cloud of Covid confusion,” he said. “It’s masking...the industries and companies that can benefit from policy shifts.” Once the Covid situation is ameliorated, he added, investors’ sentiment will shift.

Marko Papic, chief strategist at Clocktower Group and a geopolitical expert, agrees that China investments will likely deliver positive returns, at least in the short term. “I think on a 6 to 12 months trajectory, they are probably the hottest play for 2023,” he told II. He said that the Chinese government has pivoted dramatically on Covid policies and eased regulations on the technology, media, and telecommunication industry.

Growth stocks in China’s onshore market are particularly appealing. According to data from Investment Metrics, a Confluence company, China’s growth stocks have always outperformed value equities after market downturns in the past 20 years. And the rebound of Chinese growth stocks is already reflected in November’s market data. According to IM’s latest factor performance report, all growth sub-factors outperformed their benchmarks in the emerging markets last month.

“The historical data is showing me that, from a factor perspective, we have seen growth stocks in China rally more than value during recovery periods,” said Steve Reid, client success manager at Investment Metrics.

But investors’ long-term sentiment on China is a lot darker compared to their bullish outlook for 2023. “In the next two, three, five years, we expect China to continue to decelerate on a more structural basis,” Santos said, citing the country’s shrinking population as the main driver. Papic, too, thinks the new Chinese leadership comprised of Xi’s own men is likely to lead to policy mistakes and more uncertainties for investors in the long term.

“China has become a trade,” Papic concluded. “That means every 6 months, you have to reassess your allocation to China. It’s a challenge, and that’s why many [allocators] are drawing down their exposure to China to zero…But if you don’t want to participate in the rally of Chinese assets [in the short term], that’s your problem. Investors who are more nimble are absolutely going to harvest [profits] in the next 6 months.”