Carmignac

Is 2023 the year to add China to your core allocation?

  • Published
  • Length
    4 minute(s) read

After nearly two difficult years for Chinese equities due to a regulatory crackdown, geopolitical tensions, and an economic slowdown, 2023 is looking more promising for investors.

China's financial markets experienced high volatility recently as several policy decisions and other developments fuelled foreign investors’ anxiety. These developments included tighter regulations for certain industries, the financial woes of real-estate giant Evergrande, and stricter transparency requirements for Chinese companies listed in the US. Not to mention Beijing’s strict zero-Covid policy and fears that China would invade Taiwan in the wake of Russia's invasion of Ukraine.

However, 2023 – the Year of the Water Rabbit, a symbol of peace, prosperity, a return to normal, and more – could open up a new chapter for investors. Recent crucial changes in the country point to a normalisation of its economy and financial markets and could usher in plenty of opportunities, particularly in consumer-oriented sectors.

Carmignac

A brighter future

Lights are flashing green again for Chinese equities. Of the five risk factors that weighed on Chinese stocks in 2021 and 2022 - tighter regulatory scrutiny, real estate crisis, zero-Covid policy, local politics and Sino-American tensions -, four have largely disappeared now that Beijing has finished tightening regulations and is even showing support for businesses, including internet heavyweights and property developers. The outlook for the fifth risk factor – US-China tensions which have jumped back after “Chinese Spy Balloon” incident would not see escalation in our view. We see economic recovery post-covid much powerful driver of Chinese equities in 2023.

The Chinese government has made concrete changes since the Communist Party Congress in October. The most significant one was lifting its strict zero-Covid policy – a necessary move that led to the reopening of the country (albeit somewhat abruptly) on 8 January. The government is also orienting its policy towards economic growth; at the China Economic Work Congress (the country’s biggest economic gathering), for example, leading policymakers announced that boosting domestic demand would be a priority in 2023.

The speed with which China is reopening its economy may cause some short-term difficulties, but we now expect GDP growth to pick up starting in the first half and reach around 5.0% for the full year. This would make China the only major economy whose GDP growth is accelerating.

Sanguine growth prospects fuelled by domestic demand

These factors point to a sustained increase in Chinese consumer spending, which should drive revenue growth for Chinese companies in consumer-oriented sectors for years to come. An upturn in Covid infections will likely weigh on consumer spending in the first quarter, but things are expected to improve as soon as Q2 as Beijing implements its pro-growth and pro-consumption measures and both city governments and households learn to deal more effectively with Covid-19.

What’s more, Chinese households are now sitting on excess savings of nearly 18 trillion renminbi (2.5 trillion euros), including 4 trillion renminbi accumulated since 2020 due mainly to the pandemic lockdowns. This should prompt an upswing in consumer spending. A job market recovery is also on the cards: nearly one in five jobs in China is Covid-sensitive because it involves physical contact, which means that the lifting of the zero-Covid policy and the full reopening of China’s economy are likely to stimulate both corporate hiring and consumer spending. This should underpin a rebound in household consumption.

Other structural growth drivers for domestic demand in China include: a 1.4 billion-strong population; a per-capita GDP of over USD 12,500; a rising household consumption rate; and a five-fold increase in total household consumption between 2005 and 2020. In addition, if we look at household consumption as a percent of GDP, it is now 54.3% in China – substantially lower than in developed countries (82.6% in the US, for example),1 indicating there’s considerable scope for Chinese consumer spending to expand further.

Other reasons to consider Chinese equities

There are many other reasons to invest in China. It has more than 6,000 listed companies with a combined market capitalisation of over USD 19 trillion,2 second only to the US, meaning it’s a stock market that simply cannot be overlooked by investors today. Yet despite the market’s size and momentum, Chinese companies make up only around 3.6% of the MSCI All Country World Index (which comprises stocks from some 50 countries), compared to 60.4% for US companies and 5.6% for Japanese ones.

Chinese companies are priced attractively. Their average price-to-earnings (P/E) ratio – an indicator of what investors are willing to pay for a company’s stock today based on its future earnings – is now around 113, slightly below its 10-year average, while global stocks are trading at a P/E ratio of around 15. In addition, most Chinese companies have cut costs over the past three years so revenue growth should drive an earnings recovery in 2023.

Finally, Chinese equities can provide effective portfolio diversification in terms of both geographic exposure and investment themes. We see particularly strong potential in four key areas of China’s new economy: 1) industrial and technological innovation, 2) healthcare, 3) ecological transition, and 4) consumption upgrade.

After 20 difficult months, 2023 could mark a new beginning for Chinese financial markets. Although there are some risks worth keeping an eye on (like an upswing in Covid infections and geopolitical developments), we believe many of them can be mitigated through active portfolio management. An agile, selective investment approach backed by a long-term vision – in keeping with the Year of the Water Rabbit – is what’s called for in 2023.

1Source: World Bank
2Sources : Bloomberg, CICC Research, 2022
3 P/E ratio for companies in the MSCI China Index, which comprises large and mid-cap companies listed on the Shanghai and Shenzhen stock exchanges.

To find out more about the Chinese market:

Thank you for taking the time to provide your feedback, appreciated.

Marketing communication. Please refer to the KID/KIID, prospectus of the fund before making any final investment decisions.

This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Carmignac, its officers, employees or agents.

Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.

Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.

Morningstar Rating™ : © Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Access to the Funds may be subject to restrictions regarding certain persons or countries. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the material or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not access this material. Taxation depends on the situation of the individual. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA. The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital.

The Funds’ prospectus, KIDs, NAVs and annual reports are available at www.carmignac.com, or upon request to the Management Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds communs de placement or FCP) are common funds in contractual form conforming to the UCITS or AIFM Directive under French law.

  • In the United Kingdom: the Funds’ respective prospectuses, KIIDs and annual reports are available at www.carmignac.co.uk, or upon request to the Management Company, or for the French Funds, at the offices of the Facilities Agent at BNP PARIBAS SECURITIES SERVICES, operating through its branch in London: 55 Moorgate, London EC2R. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd. FP Carmignac ICVC (the “Company”) is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the FCA with effect from 4 April 2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the “ACD”) of the Company and is authorised and regulated by the FCA. Registered Office: Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY, UK; Registered in England and Wales with number 4162989. Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd (Registered in England and Wales with number 14162894) has been appointed as a sub-Investment Manager of the Company and is authorised and regulated by the Financial Conduct Authority with FRN:984288.

  • In Switzerland: the prospectus, KIDs and annual report are available at www.carmignac.ch, or through our representative in Switzerland, CACEIS (Switzerland), S.A., Route de Signy 35, CH-1260 Nyon. The paying agent is CACEIS Bank, Montrouge, Nyon Branch / Switzerland, Route de Signy 35, 1260 Nyon.

The Management Company can cease promotion in your country anytime. Investors have access to a summary of their rights in English on the following links: UK ; Switzerland ; France ; Luxembourg ; Sweden