China’s zero-Covid policy last year meant it could implement strict lockdowns in areas where the virus threatened to spread.

With it, manufacturing pauses, factory closures and the limited spending power of Chinese consumers all impacted its economy as well as its global trade, James McManus, chief investment office at Nutmeg explains.

However, the zero-Covid policy was relaxed in December 2022, with stock markets cheering the move.

“It seems there’s a new dawn for China,” McManus says. He adds: “Its economy is reopening and re-engaging with the world, exports should begin to rise again and consumers will be able to get out and spend.”

He adds that the upside will come from the domestic rebound plus the return of manufacturing to fuller capacity which “should mean the economy stands in good stead”.

This is echoed by Rebecca Jiang, co-manager of JPMorgan China Growth & Income, who says the team is optimistic about the long-term prospects for the Chinese economy, noting the growing demand from the country’s burgeoning middle classes.

Jiang says: “After an extended period of lockdown, we see the rolling back of China’s zero-Covid policy as a catalyst for recovery in 2023 and expect to see an acceleration in activity as pent-up demand is released.”

This is echoed by Elizabeth Kwik, co-manager of abrdn China, who says this could be an excellent time to get into China.

“In our opinion, domestic consumers will be the key driver of China’s economic growth in 2023. They have accumulated a significant amount of excess savings. Once the reopening benefits fully materialise in the coming months, we expect to see a rundown of this excess saving. This should benefit a wide variety of sectors – from consumer to healthcare, property and finance,” she says.

Optimism for technology and property

Another area of optimism relates to the relaxation in regulation of the technology sector, as well as measures designed to cool the property sector, Fidelity International investment writer Graham Smith notes.

He explains: “Positively for tech stocks, new rules governing areas such as data protection, data sharing and competition have now been comprehensively laid out by the Government allowing tech companies to adapt.

“During these policy adjustments, China’s fast growing technology sector suffered a severe loss of market confidence, made worse by the general malaise across the tech space globally.”

However, this has left many Chinese tech companies now looking “attractively valued”, compared to their historic averages and their global peers, Smith adds.

Indeed, for Dale Nicholls, portfolio manager of Fidelity China Special Situations, the regulatory and policy headwinds in the Chinese internet space over recent years made it very difficult for tech giants to maintain market share and return to strong margins, which had been reflected in low valuations.

“However, with an improving earnings outlook and easing regulation, we see an increasingly attractive risk-reward pay-off among the likes of Tencent and Alibaba, which remain large positions in the portfolio. Encouragingly, both stocks have started to reverse their declining trend and have risen over the past month,” he notes.

Meanwhile, the CSI 300 was up 7% since the start of 2023 (to 19 January) and was up almost 18% on October’s low, according to Bloomberg.

Further, since the end of October 2022, the MSCI China index has rallied over 50% (US dollars), against a 7% return for MSCI World and 22% for Emerging Markets.

Caution amid the optimism

For Robert Alster, CIO at Close Brothers Asset Management, China’s re-opening “will not be a smooth ride” and the uncertainty around a shrinking population plus the prospect of a surge in Covid cases as much of the population travels home for the New Year holidays, “is a cause for concern”.

This is echoed by Oliver Jones, asset allocation strategist at Rathbones who says while the economy is likely to bounce back in the first half of 2023, “the longer-term reasons for caution on both the country’s economy and its equities haven’t changed”.

He says: “Several key structural factors that informed our previous pessimism on China remain in place. Its property sector is still in its deepest downturn in decades, struggling to recover from years of overbuilding despite policymakers’ attempts to shore it up.

“Demographics are turning into a headwind too, with the country’s population shrinking for the first time in six decades last year and projected to keep falling. The longer-term policy outlook is not encouraging either.

“The push towards ‘decoupling’ is ongoing, with the US imposing tough restrictions on China’s semiconductor sector late last year and barring American investors from buying shares in a growing list of Chinese companies.”

Another big concern – which has led some fund managers to completely sell out of China – according to Kyle Caldwell, collectives editor at Interactive Investor, is that further regulatory crackdowns could be made in the future that will stifle the growth of successful companies “potentially limiting their share price upside”, he says.

“However, the counter argument is that political risk of investing in China is nothing new, and that it is a price worth paying.”

How investors can tap into the Chinese market

Smith says that Chinese shares continue to trade on “undemanding multiples of the amounts companies are expected to make this year, despite the recent rally”, citing OECD data which forecasts growth of 4.6% this year.

“Even if only this level of growth is achieved, the performances of western nations in 2023 are very likely to look pale by comparison, adding to the relative attractiveness of China”.

He adds that the MSCI China All Shares Index trades on a forward multiple of just 11 times earnings, which represents a substantial discount to both the US (17 times earnings) and world stocks (15 times earnings).

However, for many, ESG is a factor which can’t be ignored and for Dzmitry Lipski, head of fund research at Interactive Investor, “there are no easy answers when it comes to investing in China, but it’s a hard region to avoid, whether it comes to investing, or through our everyday lives, from technology and beyond”.

He says investors need to “tread carefully”, but a good way to get exposure to the region is through a fund or investment trust.”

Lipski highlights Fidelity China Special Situations Trust which provides “broad, diversified exposure to Chinese equities”, including ‘H’ shares listed in Hong Kong and mainland-listed ‘A’ shares.

“It has been managed by Dale Nicholls since April 2014. He focuses on faster growing, consumer-orientated companies with robust cash flows and capable management teams. Due to the trust’s single country exposure, its bias to small and mid-sized companies and its ability to use gearing, its return profile is likely to be more volatile, making it higher-risk and a satellite (adventurous) holding in a well-diversified portfolio,” Lipski says.

He adds: “Alternatively, investors could also consider a broader Emerging Markets or Asian fund such as Fidelity Asia or the Guinness Asian Equity Income fund.”

Meanwhile, Caldwell notes Scottish Mortgage with its long-running theme of holdings in Chinese internet stocks, such as Tencent and Alibaba.

“These firms have dented performance in the past couple of years, as Chinese lockdowns and a crackdown from the Government on tech profits have hurt investor sentiment. However, Scottish Mortgage’s near 10% allocation to China may turn out to be an advantage this year,” he says.

Alternatively, emerging market funds and investment trusts tend to have more of their money in China, with one example being JP Morgan Emerging Markets Investment Trust, which holds just over a fifth of its portfolio in China. 

“However, it is worth remembering this is an adventurous investment, and that it should be viewed as a satellite holding as part of a diversified portfolio,” Caldwell says.