China’s growth rate is likely to slow in 2022 and come in 0.5%1 behind the target figure of 5.5%, as Covid outbreaks continue to restrict society and disrupt the economic recovery.
Media headlines and forecasters have been quick to highlight that the Q4 2021 growth figure – 4% year-on-year – marks the slowest pace of expansion in 18 months. Should this be a worry for equity investors? We think not.
Why GDP doesn’t drive Chinese equity returns
History has shown that GDP growth rates have little correlation to stock market performance over the longer term and we believe market dynamics are moving in a positive direction for stock market investing. The huge depth of the Chinese equity market means that irrespective of the macroeconomic overlay, there are significant bottom-up investment opportunities, while the globalised investor base, together with market reforms, could provide a boost to top-down returns. Careful stock selection and carrying out in-depth due diligence are key to navigating this vast market, where headline growth figures reflect little of the expansive opportunity set.
Chinese equity performance drivers
1. An opportunity set too big to ignore
2. Private entrepreneurs are driving the economy’s long-term direction
3. Market accessibility is improving
4. Increasing ESG accountability
5. Strong asset diversification
Getting invested
While the debate remains lively regarding China’s future and what its economy may look like in years to come, we can see clear trends that inform our positive view on the trajectory of Chinese equities. Foreign investors are underrepresented, yet China has a large economy and an even larger population that has a lower dependence on the global economy than many other regions.
We believe investors seeking diversification and idiosyncratic alpha would be well placed to consider increasing their exposure to Chinese equities, monitoring the development of financial market deregulation and index inclusion factors.
Download the full article for more information on these five factors.