China’s economic recovery has proved underwhelming, adding to the reasons investors are souring on the country. But some strategists see enough pockets of growth to keep them from subscribing to the growing view the world’s second-largest economy is flailing.
There’s no denying growth in China has been sluggish, with the initial post-Covid recovery failing to gain significant momentum. The economy barely expanded in the second quarter, and youth unemployment hit a record high in June.
In turn, Chinese stocks have been struggling. The i
Shares MSCI China
exchange-traded fund (ticker: MCHI) has fallen almost 8% in the past year, compared with a 19% increase for the
S&P 500
in the past 12 months.
But using a western framework for China’s recovery from three years of harsh Covid-19 restrictions creates an unfair comparison that is leading people astray, some strategists say. Rather, a stronger economic rebound could still build in coming months.
“We [in the U.S.] have been back to ‘normal’ for a really long time,” Matthews Asia Chief Investment Strategist Andy Rothman, who recently returned from a trip to China, tells Barron’s. He notes that China just had a large wave of Covid-19 this past December.
“Everyone I know [there] got Covid, and most of my friends lost older family members in December. It’s really fresh for them and they didn’t get checks from the government like we did,” Rothman says. “We have to be patient that the recovery from that trauma is under way but is going to take time.”
But there are silver linings amid the sputtering economy. Rothman notes that restaurant and bar sales in May, for example, were 12% higher than prepandemic. In addition, incomes have improved, and average hours worked are near highs.
There are also other pockets of strength—including hardware companies and parts of infrastructure—that are benefiting from China’s efforts to become more self-reliant as its competition with the U.S. intensifies, says Rory Green, TS Lombard chief China economist, via email.
But these areas of strength are also why there might not be more aggressive economic stimulus in the future. So far, the situation isn’t dire enough to get Beijing to change its measured easing stance, Green says. Though he expects more stimulus, it will likely be “relatively small and, particularly on the monetary and property side, ineffective.”
Stimulus is unlikely to come in the form of direct assistance to consumers—which some economists have argued is needed to revive battered businesses and to boost consumer confidence from here.
“[President] Xi [Jinping] doesn’t believe in welfarism and is reluctant to start on a path of state largess to households that would be difficult to withdraw,” Green says. “The practical aspect, is that national consumption stimulus like checks or vouchers has never been tried before.”
However, a much worse economic situation—including a sharp rise in unemployment, accelerated declines in property price, or debt issues outside of the property sector—could spur more aggressive stimulus, Green says.
Despite the “meh” economic backdrop and continued U.S.-China tensions, some investors see near-term opportunity in Chinese stocks.
In a note to clients, Solita Marcelli, chief investment officer Americas for UBS Global Wealth Management, recommends companies that should benefit as China rolls out more stimulus and policy support. Given the market volatility, Marcelli says clients should take a barbell approach that has high-yielding defensive stocks in insurance, utilities, banks on one end, and high-quality state-owned enterprises on the other.
Mendy Zhang, an analyst for Asia-Pacific Franchise Strategy at asset manager Ninety One, sees opportunity in the companies helping China become more self-sufficient. After a recent trip to China, Zhang writes in a note to clients that software company
Kingsoft Office Software
(688111.China) has a long path to growth as Chinese companies gradually replace Microsoft Office. She sees similar upside for Glodon (2410.China), a software alternative to
Autodesk
(ADSK) used by the construction industry.
What to watch next: Green is monitoring the Politburo meeting later this month to see how Beijing is thinking about stimulus for the second half of the year. To get a sense of whether momentum could pick up, investors should also watch for the monthly purchasing manufacturers indexes and the share of retail trading in onshore stock markets—increases in either would signal improving sentiment that could lead to greater spending, lending, and investment to help drive the economy, Green says.
Write to Reshma Kapadia at [email protected]
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