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China economy
OpinionComment
Laura Wang
Laura Wang

Macroscope | End of zero-Covid policy, better Sino-US relations signal a good year ahead for Chinese stocks

  • For the first time in a long while, most of the critical factors needed to turn around Chinese stocks’ fortunes are aligned and changing for the better
  • Some longer-term challenges remain but there have been improvements in macroeconomic conditions, government policy and US-China relations

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A child points to a large screen showing stock exchange data, in Shanghai, on January 3. Now appears the right time to get back into the China market. Photo: EPA-EFE
Laura Wang
In less than three months, Chinese equities have surprised most investors. Both the Hang Seng and MSCI China indices have risen sharply while the rest of the global market has been largely flat. The S&P 500, for example, is up by about 5 per cent in the same period.

However, for many investors, it is not yet time to celebrate. Between February 2021 and November 2022, Chinese equities lagged global equity market performance and trailed their peers in both emerging and developed markets. The MSCI China Index declined by more than 60 per cent in absolute returns, underperforming the S&P 500 and the broad MSCI Emerging Market Index.

These 22 months also saw steady allocation reduction from Chinese equities into other regions. So, is now the time to get back into the China market? It seems so.
Morgan Stanley turned outright bullish on Chinese equities in early December after having been cautious for 23 months. For the first time in a long while, most of the critical factors are aligned and changing for the better.
Some of the longer-term challenges will remain, but after a tough year there has been a clear improvement in macroeconomic conditions. There are signs of a top-down pivot in government policy to stimulate the economy, some stabilisation in US-China relations and a steady improvement in clarity of the regulatory environment.
This unique recovery cycle, with structural improvements on the way, should set Chinese equities on a path to continue outperforming. This year could otherwise have been defined by slower demand growth and cuts in corporate earnings.
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