Sign for JP Morgan on March 7, 2020 in London, UK. JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York.
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LONDON – As lockdowns ease and regulatory pressures ease, some of the headwinds facing Chinese stocks will ease, according to JPMorgan.
China’s markets have taken a beating over the past 15 months as the country’s “zero-covid” strategy and major city lockdowns choked economic activity, while regulatory crackdowns hit businesses, especially domestic internet titans like Tencent and Alibaba, further under pressure.
Hong Kong’s technology-heavy Hang Seng Index is down about 25% in the past year, while the Shanghai Composite is down nearly 9%.
On Monday, Chinese markets continued to fall, overtaken by fears of interest rate hikes by the US Federal Reserve following Friday’s higher-than-expected inflation data in the US. The Hang Seng fell more than 3.5%, while the Shanghai Composite lost 1.45%.
But as China begins to reopen and Beijing signals its intention to ease its control over the tech sector amid the economic downturn, strategists are becoming cautiously optimistic.
Tilmann Galler, Global Market Strategist at JPMorgan Asset Management, said efforts to reopen cities and launch vaccination campaigns indicated Beijing realized its “zero-covid” strategy was unsustainable. Instead, the country appears to be moving towards a “living with Covid” policy, he added.
China’s two largest cities, Shanghai and Beijing, eased some Covid measures earlier last week but again imposed some additional restrictions on Friday.
However, at the bank’s annual media event in London on Wednesday, Galler argued that while the near-term uncertainties linger, the key headwinds – such as the zero Covid policy, tight fiscal stance and strict regulation – are cyclical rather than structural. meaning that China’s long-term outlook remains intact.
“Policymakers are changing their attitudes and changing the direction of policy. China tightened, but now this is changing, and the central bank will play a crucial role in that,” he said.
“The People’s Bank of China — compared to other central banks in Europe and North America — has the flexibility to support the economy more.”
The Chinese consumer price index rose just 2.1% year-on-year in April, compared to 7.4% in the eurozone for the same month and 8.3% in the US. The latter both saw further accelerations in May.
Galler suggested that, as such, further monetary easing from the PBoC could be expected as benchmark mortgage rates had already been cut.
“Much more importantly, the direction of fiscal policy is changing. There is more government support. Now there is more money earmarked for railways, infrastructure investment, investment in airports, tax cuts, car purchase incentives, for the car market that is currently faltering is,” Galler emphasized.
Headwind becomes tailwind
He added that credit growth – which has historically been a positive indicator for the stock market – was showing signs of strength.
While credit growth slowed in April, Galler suggested it was solely due to the lockdowns demanding destruction, and that it would pick up again as cities like Shanghai and Beijing resume operations.
“Short-term valuations are sometimes a terrible indicator, but at least it gives you some long-term guidance. And while we know that the short-term visibility in China is still difficult, we still believe that the long-term growth engines deadline for China are still valid,” Galler told reporters.
“After the stock market downturn, P/Es in the Chinese market are now 20% below their long-term average, so a lot of bad news is already priced into Chinese equities.”
P/E ratio is a method of determining a company’s valuation by measuring its current share price relative to its earnings per share.
“From that perspective, we think Chinese equities are starting to look more attractive despite the headwinds.
While the past 15 months have been tough for Chinese stock market investors, the country’s bond markets have outperformed their global competitors.
“From that perspective, China is good diversification for the equity portfolio, but also for the bond portfolio, because the central bank in China has different challenges than the central banks here in Europe and the US,” Galler added.
His views were bolstered by Myles Bradshaw, head of global aggregate fixed income strategies at JPMorgan Asset Management, who said Chinese government debt is the most exciting pocket of global markets right now.
“The economy is slowing down, interest rates have gone up, they haven’t eased monetary policy. It’s great diversification for your European, US fixed income,” he added.