The mood over China and Hong Kong markets changed abruptly on March 16, when the government signalled its willingness to support the market and that investors’ concerns over losing US$1.5 trillion ($2.03 trillion) in market value do matter.
Overnight, the pessimistic mood over the slew of almost punitive regulatory moves on various sectors — ranging from property to technology — that have been afflicted on the market for more than a year, lifted. This sent both the mainland’s and Hong Kong’s markets up sharply.
However, from the perspective of Pictet Wealth Management’s Alexandre Tavazzi, he is not quite ready to urge clients to jump back in.
Since last February, with the tougher regulatory stance starting to be put in place, Pictet’s discretionary portfolio has refrained from investing in China, although it maintains an overweight on Chinese bonds. The Swiss private bank also has not gone so far as to describe China as “un-investable”, which was what JP Morgan famously did just one day before the reversal was signalled.
Rather, Tavazzi, who is Pictet’s global strategist and chief investment officer for Asia, wants better clarity on how the various measures sketched out by the Chinese government will be implemented, before committing to Chinese stocks again.
“What we have heard so far are intentions. They all make sense when taken individually. The question is, what do we have in terms of implementation?” Tavazzi said in an interview with The Edge Singapore on March 21.
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For example, some of the developers are facing impending schedule of refinancing, which, based on broad directions of the measures announced on March 16, will be addressed. However, the specifics remain to be seen, for different developers are now stressed differently.
Tavazzi is being cautious, even though valuations in China and Hong Kong have reached multi-year lows because of the regulatory actions and that’s one reason why he is keeping a keen eye on this space.
“At some point, everything has a price. If we think the price we pay makes sense in terms of expectations of growth rate and earnings, we’ll be happy to go back into Chinese equities,” he says. “We’re looking opportunistically at what is taking place. Our position is a pretty nice one, because we’re starting from not having any Chinese equities in our asset allocation. So we’ll be looking at the measures and then we can be interested in stepping into the market again,” he says.
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For now, Tavazzi remains upbeat on Asean — a view Pictet has held since the start of the year. He sees 2022 as especially favourable for this region as the countries have benefitted from what has been dubbed the “China plus one” strategy, which refers to multinational companies expanding their presence in Asean to diversify their supply chain from just China.
He notes that Asean countries have widely outperformed the MSCI Asia, ex-Japan, referring to a commonly used benchmark. Vietnam, for example, is one of the “very interesting” countries because it does fit the bill for many companies to invest in new production centres.
Tavazzi believes that investors have yet to fully appreciate the benefits of the regional trade treaty, Regional Comprehensive Economic Partnership (RCEP), which includes having Asean nations, China, Korea and Japan within the same tariff zone and lowering tariffs among member countries by 90%. “You have basically the world’s most populous area in the same tariff zone — which has never happened before,” he says.
What this also means is that the member countries can reduce their reliance on exports to traditional markets in the West.
Tavazzi agrees that domestic consumption might not be enough to substitute demand from the traditional export markets. However, there’s this possibility down the road. “When we talk about investments, we always try to look at the long term. We think that the trend has started and will only accelerate,” he says, referring to the jump on intra-Asia trading volume over the past few years. “It makes a lot of sense to expect that the whole area will continue to develop,” says Tavazzi.
Within the broad RCEP economies, Tavazzi has identified industrials and consumer as two sectors with relatively good prospects. With a relatively younger population, that’s a good base for consumption to grow, and at the same time, significant investments are required for industrial activities in order to build up the manufacturing capacity. Finance, meanwhile, is also a sector to look out for, although Tavazzi believes consumption will grow at a faster pace first.
Dark clouds over Europe
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Now, with the war in Ukraine going on without prospects of resolution in the near term, Pictet, unsurprisingly, has a negative view on Europe. For one, there’s the additional complexity with Europe’s reliance on exports of gas from Russia, which is used by European consumers and businesses for heating and power generation.
In the preceding years, Europe has clearly fallen behind in terms in its investments in such critical infrastructure: It relies on a continuous piping of gas from Russia as there is insufficient storage capacity and this also allows Europe to turn to other sources if they are to stop buying gas from Russia. “Europe is especially vulnerable due to its dependence on Russia’s energy. From a Russian point of view, your bargaining power is somewhat limited as well, as you do not want to lose a very important client,” says Tavazzi.
What’s likely to happen, thus, is that Europe will continue to invest heavily to build up significant renewable energy infrastructure, be it wind or solar. Along the way, certain companies plugged into these sectors will benefit, as well as to a smaller extent, weapon-makers, given the need to beef up defence capabilities.
In the meantime, inflation amid this pandemic is hurting everyone, or, at the very least, adding complexities to what central bankers across the world ought to do with either their interest rates or their currencies.
Pictet, for one, has raised its inflation forecast for Europe this year from 4.2% to 4.9%. While not yet as high as the US inflation numbers approaching 8%, this relatively high level of inflation — if can’t be brought down quickly enough — will start to hurt consumer demand even more. “It’s as if you are imposing a new tax on people, and yes, definitely, inflation’s a big issue,” says Tavazzi.
