Chinese Stocks Start 2023 Strong, Stoking Fresh Optimism

It’s the year of the rabbit and previously moribund Chinese stocks are hopping higher. Pun intended. As of Feb. 3, the widely followed MSCI China Index is higher by 13.37% to start the year, outpacing bot the S&OP 500 and the MSCI Emerging Markets Index along the way.

Obviously, leadership from Chinese equities is pivotal to the broader emerging markets thesis because, as advisors know, many of the favored active and passive funds they tap in the name of emerging markets diversification allocate substantial portions of their weights – often 30% or more – to China.

While the Chinese economy, the world’s second-largest, isn’t hitting the ball out of the park at the moment, the country’s financial markets are benefiting from the country finally relaxing its draconian zero-COVID policy along with expectations of fewer interest rate hikes in the U.S. this year.

“Emerging markets (EM) have weathered rapid rate hikes in developed markets (DM). Central banks were ahead of DM peers in tightening, and high commodity prices helped EM producers. We see the backdrop for EM assets turning more positive as EM rates peak, DM central banks pause, the U.S. dollar weakens and China reopens. By contrast, the damage of higher rates has yet to fully materialize in DM,” according to BlackRock.

Catalysts Abound for Chinese Stocks

Following 2021’s regulatory regime, which toppled some previously beloved Chinese growth stocks, and another year of disappointment for emerging markets equities in 2022, advisors and clients are understandably chastened when it comes to Chinese equities.

Fortunately, policymakers in Beijing take seriously global investors’ perception of Chinese economy and its financial markets, setting the stage for efforts by the central bank and the government to prop up the currently fragile Chinese economy.

“Following the Chinese government’s earlier-than-expected easing of its strict Zero COVID policy, Chinese equities have rebounded strongly — up 59.9% since October — raising investors’ hopes for a growth recovery in 2023,” notes Anqi Dong for State Street Global Advisors (SSGA).” And the Chinese government has committed to supporting growth with monetary and fiscal stimulus.”

On another note, advisors that have followed China for some time know that the government there has steadily worked to reduce the economy’s dependence on exports while turning to more domestic consumption. An admirable effort to be sure, but one that was hamstrung by the lengthy coronavirus shutdowns. Fortunately, data indicate early dividends are accruing from the relaxation of the zero-COVID policies.

“Early consumption figures from Lunar New Year showed signs of recovery, too, with domestic travel back to 90% of pre-pandemic levels. This may fuel optimism of a further consumption rebound and a faster-than-expected recovery,” adds SSGA’s Dong.

Price of Admission Still Alluring

Even with the impressive start to 2023 by Chinese stocks, the asset class isn’t richly valued. Far from it. In fact, it’s cheap on a historical basis.

“And despite their recent strong performance, Chinese equities’ valuations remain constructive,” notes according to Dong. “Their price-to-earnings (P/E) ratios are in the 57th and 49th percentile over the past 15 years on an absolute basis and relative to US equities, respectively.”

Advisors looking for a broad-based play on Chinese equities that are based in that country may want to consider the the SPDR® S&P® China ETF (GXC). That $1.37 billion exchange traded fund turns 16 years old next month.

“GXC has already seen flows pick up, and was the top-performing US SPDR ETF in December. It has maintained a top-decile position thus far in January, too,” concludes Dong.

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