From Ox to Tiger

1 February was Chinese New Year. The Chinese calendar assigns an animal to each year and last year was the year of the ox. This year is the year of the tiger. I am not a Chinese astrologer, so can’t use astrological techniques to forecast market performance. But it seems that most stock markets performed like an ox – sorry, a bull – last year. Except for the Chinese and Hong Kong stock markets.

So, will the markets keep on roaring in the year of the tiger? Well, so far it has been the central banks that are roaring. With the Fed turning hawkish and the Bank of England raising rates again last week, many are thinking that the markets will behave very differently in a rising rate and high inflation environment. This topic is covered by my colleagues John Calverley and Gerry Celaya in our recent webinar, blogs and the Tricio Insights strategy papers.

But how about the Chinese stock market? Will it roar back this year? Some fund managers are turning positive about Chinese stock market, citing two reasons.

First, the Chinese central bank PBOC has started easing to address the impact of the credit crisis in Evergrande and other property developers. This should offset some of the economic shock driven by the stress in the property sector. Secondly, the sell-off in Chinese stocks has made some good companies look cheap on valuations, especially when they are compared to stocks in the US where interest rates are expected to go up this year. Bargain hunting times for long-term value investors?

If one looks closer, these fund managers are positive because China stands out when other markets have rising rates and/or high valuations like in the US. Being the only market where rates are not going up (and may even go down) AND valuations look cheap, China could be the only roaring market this year.

I do not think being different from the rest of the world is a good reason to turn positive. While the PBOC could act to ease credit conditions and provide monetary stimulus, the Chinese property sector represents about 29% of the GDP of China (based on research by Kenneth Rogoff and Yuanchen Yang). The impact on the economy from a prolonged stress in the Chinese property sector may not be softened just by PBOC easing.

But more importantly, the Chinese market is now driven more by politics than economics. In a year when President Xi is seeking an historical third term as president, the government is making wealth equalisation and better lives for ordinary citizens the highest priorities – especially since both are President Xi’s initiatives which are highly popular inside China. Any government intervention in the property sector crisis and economic slowdown is mainly to protect the daily lives and wealth of ordinary citizens. Companies and their billionaire owners will be sacrificed if needed.

This also explains why China continues to pursue a zero covid policy. Despite what people outside China think, this policy is still getting support inside China. Partly because it demonstrates the strong persistent will of the Chinese government in defeating the virus, and partly because of pride as China’s numbers look much better than the rest of the world where daily COVID infections can go up to hundreds of thousands.

There is an old saying in Chinese: crouching tiger, hidden dragon. It was used as the title of the Oscar winning movie by Ang Lee. A tiger that is crouching is not roaring. The Chinese stock market probably will remain crouching in the year of the tiger. Dragon is often used to refer to China as well. So perhaps the Chinese stock market will remain hidden for this year as well.

In any case, whether the positive fund managers or the cynical me is right, let’s say Gong Xi Fa Cai 恭喜發財! Wishing everyone a rich and successful year of the tiger!

James Chu CFA

Head of Investment Solutions

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