Sign for JP Morgan on March 7, 2020 in London, UK. JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York.
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LONDON — As lockdowns ease and regulatory pressures ease, some of the headwinds facing Chinese stocks should ease, according to JPMorgan.
Chinese markets have been battered over the past 15 months as the country’s ‘zero-Covid’ strategy and major city shutdowns have stifled economic activity, while regulatory clampdowns have pressured the further decline on companies, especially domestic internet titans such as Tencent and Alibaba.
Hong Kong’s tech-heavy Hang Seng Index has fallen around 25% over the past year, while the Shanghai Composite has fallen nearly 9%.
Chinese markets continued to fall on Monday, caught up in fears surrounding rate hikes by the US Federal Reserve after Friday’s higher-than-expected US inflation data. The Hang Seng slid more than 3.5%, while the Shanghai Composite slipped 1.45%.
However, as China begins to reopen and Beijing signals plans to ease its scrutiny of the tech sector amid an economic slowdown, strategists are becoming cautiously optimistic.
JPMorgan Asset Management’s global market strategist Tilmann Galler said efforts to reopen cities and launch vaccination campaigns signal Beijing has realized its “zero-Covid” strategy is not sustainable. Instead, the country appears to be shifting to a “living with Covid” policy, he added.
China’s two biggest cities, Shanghai and Beijing, eased some Covid measures early last week but imposed additional restrictions again on Friday.
However, speaking at the bank’s annual media event in London on Wednesday, Galler argued that while short-term uncertainties persist, key headwinds – such as its zero-Covid policy, tough fiscal policy and its strict regulation – are cyclical rather than structural, which means that China’s long-term prospects remain intact.
“Policymakers are changing their attitude and changing the direction of policy. China was getting tighter, but now that’s changing, and the central bank will play a crucial role in that,” he said.
“The People’s Bank of China – compared to other central banks in Europe and North America – has the flexibility to be more favorable to the economy.”
China’s headline consumer price index rose just 2.1% year-on-year in April, compared to 7.4% in the euro zone for the same month and 8.3% in the United States . The latter both experienced further accelerations in May.
Galler suggested that as such further monetary policy easing could be expected from the PBoC, as the benchmark mortgage rate has already been lowered.
“Much more importantly also, the direction of fiscal policy is also changing. There is more government support. Now there is more money going to railways, infrastructure investment, airport investment , to tax cuts, to car buying incentives, to the car market which is in shock right now,” Galler pointed out.
Headwinds becoming tailwinds
He added that credit growth — which has always been a positive indicator for the stock market — was showing signs of strength.
Although credit growth fell in April, Galler suggested that was solely due to demand destruction from the lockdowns, and would pick up as cities like Shanghai and Beijing resume operations.
“Sometimes short-term valuations are a terrible indicator, but it at least gives you some indication for the long term. And while we know that near-term visibility in China is still difficult, we continue to believe that long-term growth for China are still valid,” Galler told reporters.
“After the stock market pullback, P/Es (price-to-earnings ratios) in the Chinese market are now 20% below the long-term average, so a lot of bad news is already priced into Chinese stocks.”
The P/E ratio is a method of determining a company’s valuation by measuring its current stock price against its earnings per share.
“From that perspective, in our view, Chinese stocks are starting to look more attractive despite the headwinds, and we have to consider that some of those headwinds are starting to fade, and some of them are even turning into tailwinds,” Galler said.
While the past 15 months have been difficult for Chinese stock investors, the country’s bond markets have outperformed their global peers.
“From that point of view, China is a good way to diversify for the stock portfolio, but also for the bond portfolio, because the central bank in China has different challenges than the central banks here in Europe and in the United States,” Galler added.
His views were compounded by Myles Bradshaw, head of global fixed income strategies at JPMorgan Asset Management, who said Chinese government debt was the most exciting pocket in global markets right now.
“The economy is slowing down, interest rates have gone up, they haven’t eased monetary policy. This is a great diversifier for your European and US fixed income securities,” he added.