China's Growth Opportunities and Offshore Investing
From fund manager's desk
*
Greater China equities rose over January in what was a short month given the lunar now your holidays. Offshore Chinese equities outperformed onshore Chinese equities. In the Mainland,
amidst signs that the first post-reopening COVID wave has peaked, business and consumer confidence appeared to re-cover quickly, with a sharp rebound in service PMIs. Travel agency
and related service revenue is not yet back at pro-COVID levels, but the trajectory is encouraging. Thus far the economic rebound has not boon accompanied by inflationary pressure, with
some inflation in travel-related items offset by a declining park price. In Taiwan, themes sech as China re-opening. tapering inflation pressures, peaking of the Fed's rate cycle, and
technology inventory destocking, helped the market stage a strong rebound.
*The fund underperformed the benchmark during the month. Negative stock selection was partially offset by positive asset allocation. More stable consumer staples stocks underperformed
those which have greater leverage to reopening, such as Chinese liquor companies whose products tend to be consumed in social settings. Within the internet space our favored holdings
JD Health and Meituan underperformed Alibaba, which was boosted by further normalization of the fintech regulatory landscape in China. On the positive side, a strong rally from Taiwanese
technology names such as Silergy, Global Unichip and Aspeed helped performance. Market sentiment received a boost from an anticipated V-shaped recovery for ISMC and end demand
bottoming out. Within communication services, it was positive not to own Kuaishou, a video-sharing platform, and Chunghwa Telecom, a Taiwanese telecom service provider.
*During the month, in financials, we switched our exposure in private banks, using proceeds from one name to add to a stock which is more sensitive to reopening by being more exposed to
retail lending. We also added to a Taiwanese semiconductor foundry with a positive outlook and continued to add to a liquor name as a re-opening beneficiary. These trades were funded by
inflows and cash.
In the Mainland, China's provincial governments have announced their 2023 GDP targets, which aggregate to a weighted average of 5.6 per cent. Post-reopening, central and local
governments are gearing up to support economic reform, growth and employment. We expect more market-friendly policies to be announced later in the quarter.
*Chinese equities have moved up rapidly following their fourth quarter trough. We may now need to see earnings upgrades in order to support material further gains, after the pattern of
downgrades in 2022. Sentiment relating to Chinese equities and to Asia more broadly generally seems to have a more positive tone compared to that for Developed Market equities, which
are working their way through a very different part of the economic cycle. A soft landing in the West, together with any moderation of inflation, would offer a positive backdrop for the
Chinese market.
* In Taiwan, near-term market performance could be dominated by strong foreign inflows as for now the market recovery is driven by liquidity rather than any change in the fundamentals. But
more fundamental progress could be set in motion if China's smartphone demand, which has recently received a further boost, cascades down and supports the component supply chain in
Taiwan.
Source: JPMorgan Asset Management/What now for Chinese equities/Tai Hui. As on Jan 31, 2023.View entire presentation