Macro economy set to bottom out. Following a V-shaped recovery in 2020, China’s growth lost momentum since 3Q21 due to resurging COVID, summer flooding, unexpected power cuts and property tightening. We expect to see moderate recovery in 2H22, after a still tough 1H22. We expect China to speed up fiscal expenditure, carry out a constructive monetary policy and adjust the implementation pace for China’s long-term development goals such as common prosperity and carbon neutrality. 

On-the-ground checks suggest a mixed outlook. According to the CS CQi team’s industry and consumer surveys, property sales managers confirmed the moderate easing; material producers are still cautious on demand outlook and expect the high power tariffs to sustain for longer; private SME manufacturers are cautious about the year while service providers are more optimistic. 

2022 to be a better year for stocks after correction. China and Hong Kong equity markets experienced remarkable corrections in 2021, with dramatic sector rotation. Sixteen out of 22 sectors declined, led by consumer services, Macau, software, insurance and real estate. Only 36% of sectors managed to achieve more positive monthly returns than negative in 2021, in sharp contrast to 64% in 2020. Downward revision of corporate earnings was also not helpful. However, the central government is swiftly taking action to stabilise the economy, and fine-tuning macro and industry policies accordingly, which sends a positive policy signal. We expect China’s equity market is set to recover, given positive policy direction, low investor expectation, and cheap valuation, despite a near-term slowing economy. Our new index targets for MSCI China/HSI/CSI300 are 91/26,200/5,760, offering 11.7%/13.4%/17.0% upsides respectively. 

Focus on bottom up. We continue to expect multi-year secular themes to play out in 2022 but take a more bottom-up approach in sector selection, given lack of clear direction of style and sector rotation. Our top 5 sector-relative weightings are industrials (+4.2%), IT (+1.6%), materials (+1.5%), utilities (+1.0%) and energy (+0.8%), versus big under-weights in consumer discretionary (-3.2%), communication services (-2.9%) and financials (-2.8%). We had the largest increases in real estate (+3.0%), healthcare (+2.6%), and consumer discretionary (+1.8%) and trimmed our big overweighting in energy.