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Mirae Asset China Growth Equity Fund 1H22 Review
A challenging first half for China markets
China’s market was dampened by both external and internal factors in 1H22. The Russia-Ukraine conflict pushed up commodity and energy prices and equity risk premiums, while high inflation cornered the US Federal Reserve into a more aggressive rate hike cycle. As a result, the 10-year US treasury yield more than doubled from 1.51% at the end of 2021 to a peak of 3.4% in mid-June.1 This has hurt the valuations of growth equities and long-duration proxies.
Domestically, the Omicron resurgence in March surprised China’s key metropolitan areas (especially Shanghai and Beijing), causing a massive lockdown in the second quarter and severely disrupting supply chains, logistics, and production activities. As a result, China’s 2Q22 GDP was barely positive at just 0.4% year-on-year.
Green shoots appearing in China’s economy
We are, however, seeing some green shoots from China as Covid restrictions started to ease with the re-opening of Shanghai and other cities. Manufacturing and other economic activities are also gradually recovering. Policymakers are now more practical and focused on safeguarding supply chains and continuing production activities. The regulatory environment has also softened towards sectors such as internet platforms, which felt the brunt of last year’s regulatory crackdown.
Policymakers have also ramped up monetary and fiscal stimulus measures to stabilize the economy and offset the drag from the slowing property sector. However, the benefits of this could take a few months to be felt. We have seen a record amount of local government special bond (LGSB) issuances to boost infrastructure investments. The State Council has issued 33 stimulus measures, covering a wide range of mechanisms aimed at supporting businesses impacted by Covid. In addition, China’s central bank and many local governments have started to ease restrictions on the property sector.
Zero-Covid policy and property slowdown are the main risks
Though the Chinese government has loosened some restrictions on Covid, the zero-Covid policy is likely here to stay for a while, given vaccination rates among the elderly population are still low. As long as it remains in place, we expect the zero-Covid policy to restrain the recovery of consumer confidence and business activities, especially in service-related sectors.
Defaults due to the crackdown on highly-geared private property developers have continued to spread, causing a significant slowdown in property-related investments. The defaults, caused by unfinished projects from those private property developers, have also shaken home buyers’ confidence in private developers, which has caused a vicious cycle in this part of the market. We have noticed that current policymakers seem willing to tolerate more pain to obtain their structural goals. However, a continuous slowdown in property investment and related sectors is another main downside risk to economic growth this year.
Outlook and positioning
We think it will be difficult for China to achieve its 5.5% GDP target this year, given property and consumer activity are likely to remain weak in the near future. However, a correction in commodities could provide some margin support for manufacturing sectors and alleviate pressure on risk premiums.
We remain constructive towards policy-supported and secular opportunities such as Carbon-Neutral Technology and the Electric Vehicle (EV) industry. We’ve continued to see technological innovation in solar cells, while capacity expansion in the polysilicon industry in 2H22 will gradually ease bottlenecks within the solar industry. Thanks to soaring energy prices and technological advancements, the accelerating penetration of EVs in China and overseas will further benefit EV original equipment manufacturers (OEMs), battery makers, and supply chains. We have also seen signs of emerging secular trends thanks to technological breakthroughs and comparative advantages from continuous investment across the supply chain.
Regulatory softening provides opportunities in those over-penalized sectors such as internet. At the same time, future correction in consumption and property-related sectors could create opportunities to accumulate high-quality long-term champions.
Staying Ahead with Mirae Asset’s Latest Insights
1. Source: FactSet, July 2022
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