Chinese stocks and the ‘great divergence’: hedging against a U.S. recession
The Chief Investment Officer of a multi-billion dollar value investment fund, says investors should consider leading Chinese stocks as a way to hedge against the prospect of weakening western economies.
“We think China is an attractive opportunity to build exposure to great companies at attractive valuations that will act in a generally non-correlated manner to portfolio exposures sensitive to Western economic outcomes,” said Antipodes CIO, Jacob Mitchell.
“There is a great divergence happening right now between the economies of China and US. The Fed is in a delicate position whereby aggressively hiking short term rates will intensify the economic slowdown which will take some heat out of inflation but the underlying supply side issues will remain, with equity market already pricing in a mild recession in the West.
“China’s economy has been weak because policy has been tight. Unlike the West, China doesn’t have an inflation problem (inflation makes it very challenging to stimulate) and, in fact, China has meaningful capacity to stimulate.”
Return to strength ‘inevitable’ for Chinese stocks
The CIO says Chinese stocks are currently very well priced because investors continue to overlook the prospects of a recovery in the Chinese economy.
“We think some strength will inevitably return to the Chinese economy with the potential for strong recovery as pent-up demand is released, similar to the experience of other nations when emerging from lockdowns earlier this year.
“The government’s focus on the economic downside of lockdowns should ultimately see China move away from a zero-COVID policy, and these measures provide a pathway for China to continue to ease restrictions until the approval of its domestic mRNA vaccine, which is likely towards the end of this year.
“In our view, the market is yet to price a full reopening, or the potential upside from policy change that’s currently occurring, into current equity prices.”
He says the key risk to China’s recovery is that policy makers are too slow to stimulate.
A recent Asia Markets report examined new infrastructure stimulus announcements made by the Chinese government, including a $120 billion infrastructure funding package announced last month.