January 19, 2023 | 5 Minute Read
Chinese financial assets have depreciated significantly since early 2021. We believe there were many reasons for that, from real estate sector stress and tech sector regulations to geopolitical tensions and the country’s sweeping COVID-19 restrictions. Navigating China’s complex economy will still require an active, hands-on approach in 2023. But in our view, China will remain an important part of any strategic asset allocation. Since November, Chinese policymakers have stepped up property sector support and softened their stance on the tech sector. The government has also departed from its zero-COVID policies more swiftly than anticipated, resulting in a re-rating of the risk premium on Chinese assets. Chinese President Xi’s recent meeting with US President Biden also suggests a willingness to maintain open lines of communication. All of this suggests that Beijing’s policy focus may be turning back to rebooting economic activity.
In 2023, we believe it will be vital for investors to closely monitor policy in China while keeping a close eye on developments in key areas, including goods trade, international travel and commodity channels. The path for the world’s second-largest economy to reopen after almost three years of zero-COVID policy will not be straightforward. Growth could be sluggish in the first half as economic reopening triggers a rise in COVID-19 cases but could accelerate in the second. Meanwhile, we believe the housing market downturn, geopolitical tensions, and technology restrictions will keep China in focus beyond the reopening excitement.
Source: Bloomberg, Consensus Economics, Goldman Sachs Global Investment Research. Macro Outlook 2023: This Cycle Is Different. As of As of January 9, 2022. For illustrative purposes only. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.
Chinese equities rallied sharply as 2022 wound down in anticipation of reopening. But market volatility in China may remain high in the months ahead with domestic factors, including policy easing, and property stabilization, likely to influence valuations and performance. While the pace of consumption may wax and wane during the early stages of reopening, we believe there may be compelling opportunities in certain consumer-facing areas, including food, high-end liquor and cosmetics companies. Hotels, restaurants, and theme parks are also favorably exposed to any reopening-driven consumption boost. If reopening is interrupted or delayed, equities would likely struggle. That cannot be ruled out, but we think it is unlikely. Beyond the near-term catalysts, we think a focus on quality companies aligned to long-term structural trends such as innovation and sustainability is likely to boost return potential. Overall, we believe China’s size and the breadth of its equity market—already about 30% of the MSCI EM index1 and set to grow —may merit a standalone allocation for investors considering exposure to the country.
Policymakers’ emphasis on encouraging domestic innovation is spurring growth across a variety of segments, and a paradigm shift towards a sustainability-focused growth model could provide attractive secular growth trends for investors to tap into. We believe smart retail, development of fintech systems, cloud computing and an increasing focus on network & cybersecurity may represent opportunities in Chinese equities. However, we think being selective is important in the current environment, particularly when it comes to companies that are likely to face headwinds from regulatory interventions or geopolitical tensions. Investors may want to consider exposure to quality market leaders in China’s semiconductor space that have benefitted from localization trends, for example. Meanwhile, investing in the transformation of China’s energy and industrial sectors may play an essential role in achieving a green economy. Chinese policymakers have set stringent targets for de-carbonization, including a roadmap for achieving China's goal of carbon neutrality by 2060. We expect this to create potential opportunities across supply chains and propel clean energy innovation, especially in renewable energy product manufacturing and electric vehicles.
We continue to view EM ex-China equities as a diverse and distinct asset class, one that provides access to smaller countries and presents potential alpha opportunities. Attractive valuations, robust earnings, and global funds’ underweight allocations present potential opportunities for investors looking to allocate towards the asset class in 2023. However, we believe a selective approach and area expertise will be crucial to helping investors capitalize on them. The recent resilience in some EM assets and regions is a sign that investors have been differentiating between countries based on macro fundamentals, something that is likely to continue. Overall, the rapid expansion of EM economies has created a sizeable investment opportunity in the past few decades—and, in our view, will continue to do so. But EM equities can be a complex asset class to navigate. Information dispersion can be great across a universe of companies that spans five continents. We believe using a wide variety of data sources and forms of analysis in a diversified and broad portfolio can deliver an advantage.
EM economies start 2023 facing numerous challenges, including rising rates, slower growth, and a strong dollar. Geopolitical risk also remains elevated. However, we see select potential opportunities in the EM corporate bond market, which is large and diverse yet remains underinvested by global investors. EM corporate bonds generally offer higher yields than comparably rated developed market (DM) bonds. And many companies have strong competitive positions, stable business models, and possess pricing power, which can help when economic growth slows. The sector may also help to complement existing corporate bond or EM sovereign bond allocations. In addition, Asia high-yield debt—a subset of the broader EM corporate bond market—may see stabilization following record defaults in China’s high-yield property sector. Constructive housing policy developments and the loosening of Zero-COVID restrictions should also help.
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1 MSCI, Goldman Sachs Asset Management. As of December 30, 2022
Energy security is the uninterrupted availability of energy sources at an affordable price.
Inflation is the rate at which prices for goods and services rise.
Risk assets those with a high degree of risk and volatility, such as such as equities, high-yield credit, commodities, and currencies.
Alpha measures the difference between a portfolio’s actual return and its expected return given its risk level as measured by its beta.
Beta measures the historical market risk of a portfolio or the volatility of a portfolio relative to an underlying index over a defined historical period of time.
Growth-oriented refers to areas of the market more likely to realize high earnings growth in the future and likely trade at a higher price relative to their earnings than the broader market.
Value-oriented refers to areas of the market less likely to realize earnings high growth in the future and likely trade at a lower price relative to their earnings than the broader market.
The “right side of disruption” refers to companies that in our view are aligned with key secular growth trends and/or are creating new innovative solutions.
Green economy refers to investments leading the climate transition.
Equity risk premia refer to the excess return earned by an investor when they invest in the stock market over a risk-free rate.
TINA stands for There Is No Alternative.
TARA stand for There Are Reasonable Alternatives.
Speculative-grade fixed income refers to high yield fixed income.
Duration measures the sensitivity of the price of a fixed income investment to a change in interest rates.
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Treasuries refers to US Treasury debt obligations.
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Liquid alternatives are alternative mutual funds that often have characteristics similar to hedge funds but are public vehicles that can be traded easily.
Green bonds are fixed income investments with proceeds used to finance projects with dedicated environmental impact
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Drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
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German 10Y is a bond that reflects the yield received on government bonds issued by the German government maturing in 10 years.
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United Kingdom 10Y is a bond that reflects the yield received on government bonds issued by the UK government maturing in 10 years.
Italy 10Y reflects the yield received on government bonds issued by the Italian government maturing in 10 years.
US 2Y Treasury is a bond that reflects the yield received on government bonds issued by the United States government maturing in 10 years.
ICE BofA US High Yield Index value, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA Euro Corporate Index value, which tracks the performance of Euro dollar denominated investment grade rated corporate debt.
ICE BofA High Yield Master II OAS uses an index of bonds that are below investment grade (those rated BB or below).
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ICE BofA US Corporate Index, which tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
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Date of First Use: January 19, 2023 303206-OTU-1729696