Is China investors’ best bet in 2023?

Written off by many because of its disastrous zero-Covid policy and tensions with the West, some in the City are now saying that its stock market is too attractive – and cheap – to ignore. Charlotte Gifford investigates

O‘China now makes up a key position in our multi-asset portfolios’

nce seen by many observers as “uninvestable”, China is now being heralded as one of this year’s most attractive investment opportunities. For the past two years Chinese stocks have lagged behind global rivals as the pandemic, regulatory crackdowns and geopolitical tensions have curtailed growth in the world’s second largest economy.

China was already out of favour with investors, but for many the country’s zero- Covid policy was the final straw. As lockdowns kept millions of people in their homes, industrial output and retail sales slumped. Between August and November, global investors pulled more than £2bn out of Chinese stock market funds, fearful that Xi Jinping, the country’s president, would continue his no- tolerance approach to Covid at the expense of the country’s economic growth.

The average investor’s portfolio will have been sheltered from these risks, as most global equity funds have little or no China exposure. Some popular funds have also reduced their exposure as Chinese shares have underperformed. One, Scottish Mortgage Investment Trust, has cut its allocation to China from 20pc to 10pc over the past two years.

But investors may want to take another look at investment opportunities in the country. Since Xi’s decision to lift lockdown restrictions on Dec 7, analysts have been forecasting a miraculous recovery for China.

Darius McDermott of the research firm FundCalibre says: “Having finally ditched the zero- Covid policy, the subsequent faster- than- expected reopening of the economy, coupled with attractive valuations, mean that

China has become interesting again. We’ve had a good rebound in the first couple of weeks of 2023, but I still think the potential rewards over the medium to long term outweigh the risks.”

Fiona Yang, co-manager of the Invesco Asia Trust, says: “China can expect to see a post-pandemic recovery like that in the rest of the world, buoyed by returning consumer confidence.”

Analysts also believe the environment for tech companies is improving. Investor sentiment soured as Xi announced regulatory crackdowns in mid-2021. But there are signs of a more tolerant attitude: China this week allowed the ridehailing company Didi to resume signing up new customers, for example.

Mark Preskett of Morningstar Investment Management says many of the pressures that caused the sell- off in Chinese shares were easing and China “now makes up a key position” in Morningstar’s multi-asset portfolios. Goldman Sachs, the bank, has forecast that in 12 years’ time China’s economy will be larger than America’s.

Yet the cost of Xi’s draconian measures was made clear this week when official figures reported economic growth of just 3pc last year, the weakest figure, apart from 2020, since 1976. But McDermott says he was not put off. “Economic growth has slowed but is still stronger than in the West, inflation is lower, geopolitical tensions for now seem to have peaked and the stock market, as well as being cheap, is home to a plethora of opportunities.”

Reasons for caution remain. Since Covid restrictions were lifted last month the death toll has hit 60,000. Elizabeth Kwik, co-manager of the Abrdn China investment trust, says further lockdowns in the country could not be ruled out. “As cases continue to mount, the strain on the healthcare sector is becoming more visible,” she says.

“While the government is working to broaden access to Covid treatment and is pushing to vaccinate more people, it is likely that the authorities may consider targeted restrictions. That could dent near-term sentiment in the market.”

Oliver Jones of the investment firm Rathbones says China still has key structural problems. “Its property sector is still in its deepest downturn in decades, struggling to recover from years of overbuilding despite policymakers’ attempts to shore it up,” he says. “Demographics are turning into a headwind too, with the country’s population shrinking for the first time in six decades last year and projected to keep falling.”

Also, although some investors believe China’s tech crackdown may be cooling off, the government still has a firm grip on its tech giants. It is increasingly taking small stakes in companies such as Alibaba, the internet giant. But these risks are why China’s stock market valuations are among the most attractive in the world, according to Preskett. “For example, we see Tencent and Alibaba, which together make up more than 20pc of the Chinese index, both trading at around 50pc discounts to fair value.”

To manage risk, most investors who want exposure to China should consider emerging market funds such as Fidelity Asia, Aubrey Global Emerging Markets Opportunities and Guinness Asian Equity Income. For those who want more exposure, McDermott recommends Invesco China Equity; for those who want to steer clear, Jupiter Asian

Income.