Made in China

Hi there. It seems like a long time ago, but at the start of March we talked about the surprising strength and speed of the rebound in China and what it could mean for Chinese equities, and more broadly, for EM equities as well.

But, I have to say the last six months have been a disappointment and that rebound hasn’t really followed through. The reasons [for this] we think are that there are 3 main headwinds facing China right now. Firstly, the consumers are not really incentivised to spend, because they’re really worried that their main savings vehicle, the housing market, is not going to be supported by the government. But, the government is unwilling to enact a huge stimulus package because it’s worried that the leverage in the system, not just in housing, will make the whole issue unstable.

And finally, China’s also suffering from a lack of demand for its exports because of the slowdown in global growth, which had a really big boost post-Pandemic.

So there is one positive, which it has a weaker currency right now that could help, not only for China’s exports, but also globally for the soft landing where China is once again exporting deflation.

So, it’s a complicated issue, but we don’t think the opportunities are going away. It’s just harder to find now, than ever before. And, so that’s why we think a dedicated China allocation really makes sense now. It helps you manage your returns and avoid risk. And, how it does that is through an active allocation because there are still political risks out there, but there are still huge opportunities which you need to capture.

So for us, allocating to China still makes sense, but to do it stand-alone, and do it active.

Thanks.

Altaf Kassam,
EMEA Head of Investment Strategy & Research

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