For the past year, China has been under the weather. Stringent Covid restrictions and a debt-laden property sector have been weighing on the economy. Its economy grew only 3% in the first nine months of 2022.
Government measures over the last week can lift the burden and get the second-largest economy in the world to start moving again. This can be good and bad for your portfolio!
What’s New?
The Government set out a 16-point policy to boost the property sector - extending financial support for developers, easier credit access to developers, and lower hurdles for buyers.
It also set out a 20-point policy to reverse the stringency of its Covid-intolerance - lower quarantine times, more vaccinations, and easier restrictions.
This could mark the beginning of a reversal in the state of the economy, and may set a path for China, which was seen across the world post-easing of Covid restrictions.
The Good for Your Portfolio 🎉
China’s economic growth can bounce back from the tepid 3% right now, with its central bank already being pro-growth and monetary policy easing.
You can consider buying into China through these mutual funds and/or ETFs:
Axis Greater China Equity FoF
Edelweiss Greater China Equity Offshore
Mirae Hang Seng Tech ETF FoF
Nippon India ETF Hang Seng BeES
Or, invest in companies that have a high Chinese exposure like Tata Motors, where nearly 30% of JLR sales are from China, and most of Tata Motor’s revenue and profits come from JLR.
Or, invest in companies which will benefit from China’s colossal appetite for commodities, which is likely to push the price of metals like Copper higher - Hindustan Copper or Hindalco.
The Bad For your Portfolio 🔪
Over the last two years, China’s weight in the MSCI Emerging Market Index has come off by 9 percentage points, and that of India has jumped by 6 percentage points. China’s weight still remains the highest at 27%, whereas India is in second place at 16%.
At the same time, returns for the SSE Composite have been -13%, and that of Nifty 50 have been +3%. Moreover, China is trading at 10x, which is at a 40% discount to the Indian markets.
If global investors get a turnaround in China, while their home economies suffer, and when India trades at the highest-ever valuation premium, it would make sense for favourable foreign flows to possibly reverse, keeping the index under check.
💡 Our View: A Chinese comeback could imply a foreign flow reversal from India, given the bargain (and growth upside) the Chinese market has to offer. While domestic flows remain strong for India, we’re just highlighting a potential negative, which may keep the Indian index under check, especially at peak valuations, and downside risk to growth.
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