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Investment Ideas 2022

China: Too Big to Ignore

Even as growth slows, investment opportunities abound in the world's second largest economy.

The world's second largest economy faced challenges in 2021. A housing slump raised solvency concerns in real estate, credit and fiscal policy tightened and companies faced regulatory changes, keeping equity markets volatile and sapping some of the economy’s strength. For investors, though, China's growth potential may make it too big and too important to ignore. Yet when it comes to capital allocation, many remain underexposed to China, which is expected to overtake the US as the world's largest economy by 2030.

Exhibit 10: Pace of growth is slowing but quality of growth is improving 

Source: CEIC, Macquarie Research. As of December 31, 2021. 

Exhibit 11: Consumption and services are becoming more important 

Source: CEIC, UBS estimates. As of November 2020.

We expect real GDP growth in China to slow to roughly 5% in 2022. But the quality of growth continues to improve (Exhibits 10, 11), with the focus shifting to consumption and away from state-directed investment. 

 

First, China has commitments to large-scale investments to reduce carbon emissions and build a greener economy. Second, China is moving up the value chain and transforming from the world's low-cost manufacturer to an innovator in areas such as technology and healthcare. In short, it appears the government is willing to accept slower growth now for a more resilient economy later.

 

The odds of a housing-driven financial crisis appear to have eased. The property market may slow further in 2022 as policymakers deleverage the sector. But a coordinated fine-tuning of policy settings by the Politburo, central bank and others is likely to strengthen property sector stability. This has turned us more constructive on the sector outlook and the potential investment opportunities associated with it, particularly in the high-yield debt market. 

 

The shifting regulatory landscape may affect corporate margins, but we don't expect it to cause lasting problems for most Chinese businesses. For instance, while new anti-monopoly regulation weighed on Chinese technology companies last year, we still expect ongoing online and offline integration in the country to drive growth for the tech sector. Navigating an ever-changing regulatory environment will require a deliberate and active approach to security selection, but with the government having set a clear direction on regulation we think astute managers should be able to avoid companies that are likely to be impacted.

          

Investment Ideas to Consider

Mainland China Shares

China A-shares-the shares of mainland China-based companies that trade on domestic exchanges and are denominated in renminbi-have offered significant alpha generation opportunities across a universe of more than 4,000 stocks. In 2021, one-third of the top 50 performing stocks as measured by total return in the MSCI ACWI Index traded on Chinese domestic exchanges.3 Investors can access the market through a dedicated China-A shares solution or a global EM equity solution. A China all-shares solution, meanwhile, may let managers make relative value calls between A-shares and offshore Chinese equities. China-A shares are still dominated by heavy retail trading and neglected by a large share of sell-side equity analysts, which we believe can create alpha-generating opportunities for active managers. 

 

China's Government Bond Market

Chinese government bonds have offered attractive yields and low correlation to other major bond markets and index inclusion means increasing passive flows may lead to bond and currency appreciation. Income-oriented investors may also find opportunity in Chinese credit. A tilt toward more dovish monetary policy and improving liquidity conditions may present an opportunity to generate attractive risk-adjusted returns in the property sector of the Chinese high-yield market without venturing too far down the credit spectrum. Meanwhile, China's road to carbon neutrality may provide direct lending opportunities tied to corporate de-carbonization efforts. 

 

Private Market Alpha

Growth and venture capital investment remains strong in China and may offer additional alpha opportunities. The regulatory reset may favor a focus on private investment opportunities in sectors that will help China transition to its next phase of development, including healthcare, and in companies aligned with the government's sustainability goals.

 

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Investment Ideas 2022

Download the full report to explore the year’s key themes.

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China

3 Source: FactSet. As of December 31, 2021.

Risk Considerations

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.

High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.

Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

An investment in Private Equity is speculative with a substantial risk of loss. An investment in private equities is not suitable for all investors. Investors should carefully review and consider their potential investments, risks, chargers and expenses before investing. Private equity investments are speculative, highly illiquid, involve a high degree of risk, have high fees and expenses that could reduce returns, and subject to the possibility of partial or total loss of capital. They are, therefore, intended for experienced and sophisticated long-term investors who can accept such risks.

Glossary

Alpha: Alpha refers to returns in excess of the benchmark return.

Correlation: Correlation is a measure of the relationship between two variables. 

Dovish: Dovish refers to relatively more accommodative monetary policy. 

GDP: Gross Domestic Product (GDP) is the value of finished goods and services produced within a country's borders over one year.

General Disclosures

The views expressed herein are as December 31, 2021 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

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Date of First Use: January 12, 2022

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