By Steve Brice
How to invest in China is the question I get asked most often. China faces a lot of headwinds, the economy has slowed significantly since the reopening in late 2022 and early 2023, and geopolitical tensions are everywhere, so I think there can be a three-pronged approach to investing in China.
First, focus your investment in China** on areas where there is less resistance; secondly, diversification into the rest of Asia; Third, reallocate some of your investments to equity long-short hedge fund strategies.
I find it useful to chat with taxi drivers, they are an important indicator of market sentiment. First I tell them that I help investors identify risks and opportunities in the market, and then wait for them to ask questions. From 1999 to 2000, they asked questions about tech network stocks, in 2008 around the housing market, and in the summer of 2011 about **. They coincide with the formation of major bubbles and ** peaks.
Most of the questions in 2023 revolve around two themes, one about the "Magnificent 7" (the seven US tech stocks that drove the market up) and artificial intelligence.
Now I want to talk about China. The market is generally bearish on China's outlook, and we do have good reason to be concerned about China's economic outlook. First, large-scale overinvestment in the real estate sector has put enormous pressure on economic activity. The real estate sector has been the main driver of economic growth for the past 10 to 20 years, so the authorities decided to tighten their controls, effectively removing a key element of economic growth**. At the same time, real estate** may need to be significantly downgraded, which will have a significant negative impact on consumers' wealth.
Second, China's rapidly aging population will cause productivity to slow down, as a result of the loss of productivity acceleration.
Finally, geopolitical tensions have left the outlook for domestic and foreign companies' direct investment in China very uncertain. China's foreign direct investment (FDI) has begun to decline, while Chinese domestic firms have continued to expand their investment in other markets.
Should we abandon investing in China? This is the wrong thing to do. While China's economy faces significant headwinds, it is expected to grow faster than developed countries. At the same time, valuations in China are very cheap and market sentiment is very negative, which means that the hurdles in the short term are very low.
Therefore, for those investors who have a large investment in China, we recommend a three-pronged strategy. First, focus on sectors that are likely to outperform the market and avoid sectors that may be underperforming. Over the past two years, our sector allocation has outperformed our benchmark by significantly on average. We are bullish on the communication services and consumer discretionary sectors at the moment.
Second, expand the scope of investment to the rest of Asia. Geopolitical risks affect the sentiment of investing in China, but they are good for the economies of other countries, and foreign direct investment and changes in the direction of foreign direct investment and ** flows could benefit Thailand, Indonesia, Malaysia, Vietnam and even India. At the same time, in the coming months, the global semiconductor will enter a ** cycle, which may support the performance of Taiwan and South Korea**. We are also bullish on Japan's outlook as the economy appears to be recovering from decades of deflation and is shifting its focus to shareholder returns, buybacks and higher dividends.
Third, don't just focus on long-term investments in China. We found significant differences in performance across ** and sectors, especially in China, but also in the rest of Asia. As a result, shifting some of our allocations from China** to Asia** should reduce portfolio volatility and help improve returns. *
Steve Brice is the Global Chief Investment Officer of Standard Chartered Bank's Wealth Management Division.
The "Big Seven" refers to seven U.S.-listed technology companies: Apple (AAPL), Microsoft (MSFT), Google's parent company Alphabet (Goog and GooGL), Amazon (AMZN), NVIDIA (NVDA), Tesla Tesla (TSLA) and Meta Platforms (Meta).
This article is for informational purposes only and is not intended as investment advice or solicitation