Summary
Allianz Global Investors’ 2022 Asia Conference explored how China’s commitment to pro-growth policies and the economy’s continuing dynamism were helping reinvigorate the country’s long-term investment prospects after a challenging period.
- Stability is emerging as a priority for Chinese policymakers following uncertainty created by China’s zero-Covid policy, regulatory crackdowns and slowing global growth
- Decarbonisation is a key theme: the government’s commitment to being carbon-neutral by 2060 is opening investment opportunities outside the normal areas of electric vehicles and renewables
- Technology and innovation, the driving force for China’s economy and equity market, is opening up opportunities in a range of sectors
- In the broader Asia region, a credit crunch for middle-market companies is creating openings for investors in private credit
The following article is a summary of insights from our June 2022 Asia Conference.
It’s been a year of volatility in Asian markets, especially China, as the Covid-19 pandemic has limited travel and made it more difficult for investors to discover what’s happening on the ground. From geopolitics to China’s zero-Covid policy and regulatory crackdowns, there has been plenty to worry financial markets. Yet there are signs the situation might be easing ahead of the important 20th Communist Party Congress in the autumn.
2022’s concerns created a perfect storm for China equities, but markets there have recently rallied. As Covid cases have fallen and lockdowns lifted, so equities rose sharply in June. And while China’s 5.5% gross domestic product growth target1 might appear challenging after the year’s business disruption, Beijing is focused on restoring economic momentum.
Politics lift equities
Forceful policy measures are beginning to stimulate growth and lift equities. Notably, credit is loosening in areas such as housing. China equity markets usually track credit conditions.
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“Thinking ahead to the second half, there’s a big put option on the market,” explained Tessa Wong, Allianz Global Investors Product Specialist. “Ahead of the Party Congress, the priority will be stability.” |
Speaking during AllianzGI’s Asia Conference on 28-29 June, Wong reminded investors of the importance of taking a long-term perspective. The potential for higher returns comes with volatility, she noted. But previous corrections in 2008, 2016 and 2020 had ultimately proved to present buying opportunities.
The areas where AllianzGI’s analysts foresee sustained growth are linked to government policy priorities, including self-sufficiency, infrastructure and renewable energy.
A commitment to decarbonisation
Following President Xi Jinping’s 2020 pledge to the UN General Assembly that China would be carbon neutral by 2060, Beijing’s commitment to decarbonisation is well known. As the world’s biggest CO2 emitter, responsible for almost a third (31%) of emissions2, it has a long way to go.
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“People wonder why China committed to such a tight timeline,” said Shannon Zheng, Research Analyst, “but environmental sustainability is important because China has a vast land mass and a high proportion of the world’s population. Also, going to net zero fosters technological leadership, economic growth and energy self-sufficiency.” |
The push for decarbonisation is creating further investment opportunities beyond the traditional areas of renewable energy and electric vehicles, she added.
Technology to boost the economy
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“Technology will be the driving force for China achieving its goal of doubling GDP by 2035,” noted Jason Hsu, Research Analyst. “Further, many companies are looking to technology as the enabler of their future growth – this creates some interesting investment opportunities.” |
China’s innovation is accelerating. It’s now the largest market globally for electric vehicles, the leader in renewables, has the largest 5G network, has more than 1,000 new drugs in development, is the world’s largest market for industrial robots and has performed the highest level of autonomous vehicle tests globally.
Government policies to rein in consumer technology and focus instead on industrial technology have been reflected in equity prices.
Private credit: demand outstrips supply
Turning to the rest of Asia, Sumit Bhandari, Portfolio Manager, Asia Private Credit, highlighted the shortage of credit for middle-market companies. International banks have focused on larger firms since the global financial crisis, he said, while local banks have reached lending capacity limits.
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“From an investor’s perspective, we believe that this will be attractive, both for its returns and the low volatility because you are lending against cashflows,” he explained. “This makes it much closer to the real economy, away from the financial markets.” |
Rewards to come
Summing up the conference, William Russell, Head of Product Specialists, Asia Pacific, emphasised the huge economic dynamism that can be forgotten amid volatility.
1 Source: Bloomberg, 5 March, 2022
2 Source: Nature, 5 April, 2022: Nature.com
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Summary
Inflation is high in much of the developed world, although there are signs headline inflationary pressures may be waning. But higher prices may stick around. Core inflation, excluding volatile food and energy prices, are likely still to peak. So, how can investors navigate inflation?