The Strategist

Focus on China

China has returned to the growth path and is expected to dominate global economic growth in the coming years. This is sparking investors' interest. We see potential in emerging market equities and especially in Chinese stocks.

Thomas Wille
Tempo di lettura
10 minuto
China Shanghai
© Shutterstock

Western economies continue to struggle with excessive inflation and weak growth. At the same time, the leading central banks - the Federal Reserve (Fed) and the European Central Bank (ECB) - have little room for manoeuvre. In the US, the debate over the debt ceiling is creating additional uncertainty. By contrast, the situation in emerging markets is not comparable to that in the major industrialised countries. Asian economies, and China in particular, are the focus of investors in the medium to long-term. China has returned to growth since reopening after the corona pandemic, and with an annual inflation rate of 2%, the People's Bank of China (PBoC) has considerably more room for manoeuvre than the Fed and the ECB.

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Growth engine

According to the International Monetary Fund (IMF), global economic growth over the next five years will be dominated by China and India, accounting for more than 35% of the incremental global GDP growth. The world's largest economy, the US, will only contribute 11% over the same period. Because of its size, the Chinese economy is a crucial driver of the global economy. Its influence, both on the demand side (commodities) and the supply side (manufacturing), is critical and indispensable. China also plays a decisive role in the consumer sector. For luxury goods companies like LVMH or smartphone manufacturers like Apple, Chinese consumers are hugely important. Furthermore, Chinese visitors are essential for European tourism.

It goes without saying that investors should neither underestimate nor neglect geopolitical risks. Current topics such as peak globalisation will continue to create uncertainty. In our view, however, the wheel of time will not be turned back, but we may see increased regionalisation or bloc formation. Despite ongoing tensions between the world powers, the major economic regions such as the US, Europe and Asia rely on each other, as the value chains of globally active companies are highly integrated and thus interdependent.

Attractive opportunities

The macroeconomic environment is favourable for emerging market equities, and especially for Chinese stocks. From a fundamental perspective, with P/E of 11x and EV/EBITDA below 9x, valuations are attractive in both absolute and relative terms, as well as historically over the medium to long-term. Weaker economic growth in the G7 countries could be a headwind in the short-term. However, with the US dollar likely past its peak and prone to weakness in the medium-term due to its overvaluation, we see potential for emerging market equities, and Chinese stocks in particular.