Chinese markets: Optimism arrived earlier, bumpy road ahead

The Politburo, the top decision-making body of the Chinese Communist Party, released last week a document focusing on the country’s economic growth in 2023. Meanwhile, the Chinese government also started to exit its zero-Covid-policy, much sooner than anticipated. These intentions signal an earlier-than-expected recovery of the Chinese economy.

Market sentiment turned optimistic after a series of supportive policies announced since November, as witnessed in strong rallies of the Chinese property and Macau gaming sectors. It is expected that the Central Economic Committee, scheduled to meet this week, will reveal more details on additional economic stimulus to achieve a 5% GDP growth target for 2023.

In previous reports, we have highlighted that the key uncertainty for economic recovery is the progress in relaxing the zero-Covid-policy. On December 7, 2022, after the Politburo announcement was made public, the State Council released a 10-point plan to further ease the country’s strict Covid policy: except for high-risk sites, negative PCR test results or health codes are no longer needed for public places or for cross-regional travel; home quarantine is allowed for asymptomatic patients or patients with mild symptoms; high-risk areas may now be classified based on a single floor or a single household; and lockdowns for entire residential compounds and communities will stop.

This is a pivotal turning point for the Chinese economy, showing a light at the end of the tunnel ahead of the previously anticipated March 2023 gradual re-opening. Although we expect to see an uptick in near-term Covid cases before normalizing, the re-opening is most likely irreversible. The Chinese population will learn to live with Covid like rest of the world, which underpins the economic recovery for China and for emerging markets in general.

The Chinese government’s latest boost for the property sector is supported by its systemic importance, with housing and affiliated sectors accounting for about 25% of China’s GDP growth. We believe the Chinese property sector offers attractive opportunities for investors keen to dig deeper and find value. We foresee the worst of the current real estate crisis to be over soon, although the housing sector recovery will only be gradual and more likely “L” shaped in 2023. It will stabilize first, then stay at a flat but more sustainable level. We don’t anticipate contract sales to go back to 2021 historic highs. If the current policy direction remains firm, alongside a stable Covid scenario, China’s property sector could recover steadily with prices relatively stable in the future.

We expect emerging markets to head for a rebound in 2023, after a challenging 2022. Central banks from developed countries have signalled their desire to slow down the pace of rate increases. Lower rates and a weaker US dollar are positive for emerging markets fund flows and asset prices. The outlook for the Chinese market has been significantly lifted after the latest aforementioned Chinese government moves.

Albeit bumpy roads ahead for the sector recovery, contract sales are a key factor to watch, we are positive on Chinese property credits, especially those “survivors” who could recover faster in coming years, even if valuations for some top performers are less attractive now than one month ago. We remain optimistic on the sector for the next 12 months and believe many laggards and selected stressed / distressed names offer the most value even after the recent strong rally. We also find attractive opportunities in the Macau gaming sector, considering major uncertainties are behind us, including the renewal of six casino concessions, China’s relaxed Covid policy, and still attractive relative value.