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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional or accredited investors only. This material is provided for informational purposes only, should not be viewed as a current or past recommendation and is not intended to constitute investment advice. Forward-looking statements should not be considered as guarantees or predictions of future events.
Among the key investment themes capturing the focus of multi-asset investors in 2024 is the outlook for Chinese equities. Faced with a confluence of geopolitical concerns and macroeconomic challenges, the MSCI China Index has delivered almost no return, annualised, over the last decade. In response to this lower return for higher risk relative to developed market equities and the unreliable diversification benefit, many asset allocators have chosen to underweight China in their portfolios.
Looking beyond the current bearish narrative, there is little doubt that this complex and unloved asset class faces several structural challenges. On the other hand, the market is deep and full of opportunity, underpinned by an economy that, despite recent difficulties, is still resolutely moving up the value chain.
Wellington’s no-CIO structure encourages a broad and diverse set of investment views. Unsurprisingly, one such example is our investment experts’ range of opinions about the prospects for China’s economic growth, policy, geopolitics and equity market fundamentals.
Here, we bring the investment debate at Wellington alive by presenting both the bull and bear cases for Chinese equities as well as the aggregated views from our multi-asset team, to help inform our clients’ investment conclusions.
What is the outlook for economic growth in China?
Multi-asset team view
On balance, our view leans slightly negative in the near term. Prolonged weakness in the property sector, demographics and deleveraging may overwhelm any positive cyclicality and cap the upside for Chinese economic growth in 2024.
How will policy impact the outlook for Chinese equities?
Multi-asset team view
Our read of the policy outlook for China is more positive. While it is difficult to predict the timing or scale of further policy support, we think the trajectory of policy should gradually improve from here.
What influence will geopolitics have on the asset class?
Multi-asset team view
Geopolitics will remain a source of volatility for Chinese equities. In our view, this necessitates both smaller position sizing and active management at both the asset allocation and stock selection level.
What is the outlook for equity fundamentals?
Multi-asset team view
While valuations are undoubtedly cheap and negative sentiment may create tactical opportunities, we anticipate a lower multiple given unquantifiable geopolitical risks and an unpredictable regulatory environment. Market structure remains a challenge for index-based investors, presenting a further hurdle for any significant reallocation.
While structural challenges remain at the index level, we see a number of interesting opportunities within Chinese equities after a prolonged period of underperformance. Based on our views above, we would highlight three potential actionable investment ideas:
Stay up to date with the latest market insights and our point of view.
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Philip Brooks, CFA