Key points
• The overall risk remains elevated, considering the potential for unchecked regulation and the recently affirmed zero-covid approach
• But the macroeconomic news flow has turned from negative to neutral, including more support from the People's Bank of China (PBOC)
• China is now outperforming most major markets on a YTD basis - illustrating a significant shift in sentiment from three months ago
• Compared to past market recoveries after severe drawdowns, there appears to more room to the upside, but with high volatility
2021 was a record year for dividends around the globe Our EMEA ETF Investment Strategy team believes that while Chinese equities may need to consolidate in the short-term, the recovery since the March 2022 low remains on track.
While many developed markets hit fresh lows over the past weeks and are increasingly grappling with recession fears, China has quietly charted a path to recovery - at least for now. In early May, we looked at past drawdowns and postulated that while the latest episode was severe, it was not unprecedented either. We noted that based on past observations, it was time for a short-term rebound.
In the meantime, with some more encouraging data coming out of China, including receding covid fears and hopes for more fiscal stimulus, the FTSE China 30/18 Capped Net Index has moved up some 18%1 and is now outperforming global, US, European and broad Emerging Markets on a year-to-date basis.2 This represents a significant shift in sentiment within the last three months. We are, of course, not out of the woods yet. Short term, China is still slowing down and investors continue to face idiosyncratic risks that can't be found in other markets, most notably unchecked regulation and the zero-covid approach. Nonetheless, we believe it is time to dare a look ahead.
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Sources
1. Source: Bloomberg, based on USD, from May 9th to June 28th, 2022.
2. Source: Bloomberg, June 28th, 2022. Global markets = MSCI ACWI, US = S&P 500, Europe = STOXX 600 Europe, Emerging = MSCI Emerging Markets. All in USD.
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