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by Lorenzo La Posta, Senior Analyst at Momentum Asset Management

Chinese Investment Updates

When it comes to China and Chinese investment updates we are not short of significant news and while the west is struggling with rising rates and elevated inflation, China is facing a different set of issues that still have global consequences.

On 22 October, the country witnessed the closing of the 20th Chinese Communist Party Congress, where president Xi Jinping consolidated his power for another five years, becoming effectively the second most powerful person in modern Chinese history, after Mao Zedong. Financial markets were disappointed, with Chinese stocks experiencing the deepest daily fall since 2008.

While the re-election itself was widely expected, what markets didn’t like was that Xi’s politburo is now composed of his supporters only, with his predecessor Hu Jintao having even been escorted out of the congress. What they liked even less, is that during the congress the word “security” was mentioned more frequently than the last congress five years ago, while the word “reform” significantly less, raising fears that this new regime in China might actually follow the recent past: zero-Covid policy, common prosperity and the (mostly grim) economic consequences of the two.

We expect the public sector to continue strengthening over the private sector and that the Party’s social reforms should support growing the middle class. Whilst the former may not necessarily be a positive from the perspective of an international investor, the latter should benefit the country and ultimately the growth of a broader investible universe. Moreover, technological growth is still heavily incentivised, and we expect economic growth to come back to being a priority in the coming months, as that is a key element to common prosperity and social stability.

Market expectations post the 20th Chinese Communist Party Congress

Markets have been revising down their expectation around the country’s economic growth over the past 18 months and today Chinese equities are down about 50-60%1 from their peak in February last year. However, it is seemingly obvious that investors are eager to put money to work and hungry for a pivot in narrative around the zero-COVID-19 policy. The stock market valuation has rarely been as attractive in recent years and the catalyst it needs is simply a small step in favour of global and local investors, a hint of easier conditions. Last week, for instance, markets cheered the continued rumours of zero-COVID-19 rules being relaxed in order to prioritise the economy and rallied on the back of a picture that circulated on social media, unveiling the existence of a “reopening committee”.

We don’t spend much time on Chinese social media, nor do we invest based on rumours and hopes. However, despite the depressed market sentiment, high volatility, and weaker economic data, we believe the investment opportunity within Chinese equities remains strong. Active management is key, and to take full advantage of the available universe we advocate the use of experienced stock selectors as the best solution, from a risk and return perspective, to navigate current risks and select outstanding businesses that will prosper and grow.

A note about Lorenzo

Lorenzo joined Momentum’s investment team in 2018 and is now a Senior Analyst. He leads the research on systematic strategies and is more broadly involved in quantitative research, asset allocation and manager selection. He contributes to the management of the Harmony Portfolios multi-asset range and Momentum’s global developed and emerging markets equity funds. Prior to joining Momentum, Lorenzo worked at Julius Baer as a quantitative investment strategist for the CIO office. He is a CFA Charterholder and has a MSc in Financial Engineering from the Ecole Polytechnique Federale de Lausanne.