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Analysis-Xi’s next term needs a new Chinese portfolio, investors say

FILE PHOTO: Xi's next term needs a new Chinese portfolio, investors say
FILE PHOTO: FILE PHOTO: People’s Liberation Army (PLA) soldiers are seen in front of a giant screen as Chinese President Xi Jinping speaks at a military parade marking the 70th anniversary of the founding of the Republic of China. People’s Republic of China, on National Day in Beijing, China on October 1, 2019. REUTERS / Jason Lee / File photo / File photo

December 10, 2021

By Tom Westbrook

SYDNEY (Reuters) – For global banks and fund managers charting their China investment strategies in 2022, one factor occupies their mind but leaves out valuation models. : President Xi Jinping for the next 5 years in office.

After removing term limits in 2018, China’s most powerful leader since Mao Zedong is steering the country back to its socialist roots, transforming financial markets.

Crises for internet giants, real estate developers and education have sent China’s MSCI index down 20% in 2021 compared with a 15% rise in world stocks, while the market China’s once famous high-yield debt market has collapsed.

There is a growing opinion that the sale is overdue, but with Mr Xi, all but securing an unprecedented third term next year, and with policy change, investors that positioning for the coming era is a delicate task rather than simply bargain hunting.

“What you buy today and what you buy in the future will be completely different from what you bought last year, five years,” said Chi Lo, senior strategist at BNP Paribas Asset Management in Hong Kong. before or 10 years ago”.

The new regime of Xi Jinping’s government will be more properly supervised, more regulated, he said.

“The operating model of companies will have to change… what the Chinese government wants to develop will be key in determining the composition of your portfolio.”

Lo suggests avoiding “dusk” sectors like coal and steel to focus on obvious priorities like high-tech manufacturing or emission reduction projects.

Other global banks have come up with similar ideas.

Goldman Sachs has compiled a “commonwealth portfolio” of 50 stocks that includes renewable energy companies, several consumer-facing companies, and state and technology companies focused on research. research, among other companies.

JP Morgan has highlighted the potential of electric vehicle “new heroes”, such as BYD Co Ltd, and advanced manufacturing while the “old heroes” in real estate fade.

Jack Siu, Greater China chief investment officer at Credit Suisse, is watching for the possibility that the company’s earnings will be upgraded next year, as “we’re likely to see some supportive and political fiscal policy. moderate or slightly less tight monetary policy” ahead of the party congress, which could open up another term for Mr. Xi.

Morgan Stanley expects the aforementioned consensus economic recovery to 5.5% growth in 2022 when policy is eased.

Societe Generale, said China has the highest growth potential in Asia next year, is overweight for staples, 5G and high-end manufacturers, and said its blue-chip CSI300 China is more in line with policy priorities than the MSCI index, which is heavily weighted for some favored internet companies.

Societe Generale strategists said: “While we believe the risk/reward has improved for big names on the Internet, we maintain a strategic approach to commonwealth themes. , on the basis of structural policy”.

NORMAL GOOD

“Commonwealth” is not a new concept in China, first mentioned by Mao in the 1950s. It has achieved currency as a catchphrase of the Xi era for a new impetus to collect money. narrow the gap between rich and poor and promote more inclusive growth.

Xi has also made a renewed effort to de-lever the real estate sector, seeking to limit tech companies’ grip on data and commerce, and promising to be carbon neutral by 2060. .

What the markets rattled on and made investors wary of was not the broad direction of the program – which bulls now seem set for about a decade to come – rather. its unpredictable applications, especially as Mr. Xi consolidates power.

To be sure, policy risks are always present in China. But a year of seismic changes – sometimes heralded through economic regulation comments in state media or a series of puzzling leaks – makes it stand out. .

“It’s a big worry for us, because you don’t really know what the Chinese Communist Party thinks,” said Mark Arnold, chief investment officer at Hyperion Asset Management in Brisbane.

“You really have an almighty government, a real one-party state that’s evolving into a one-man state, so you don’t have feedback loops or defense of democracy.”

The flows suggest it hasn’t yet spooked foreigners into stocks, according to data from BNY Mellon, showing consistent equity inflows this year against bond sales being held back by data from BNY Mellon, according to data from BNY Mellon. affected by the debt crackdown by developers.

Foreign capital inflows into China’s stock market totaled 241 billion yuan ($40 billion) in the year to the end of September.

Capital inflows into China’s interbank bond market totaled 598 billion yuan in the first 10 months of 2021, up 18.4% from the end of 2020. The ICE BofA Index of Investment Grade Chinese Bonds China has stabilized this year compared to the high of China down 30%. -yield index.

For some, the risk of missing out on China is greater than the risk of getting hurt.

“If you are a global pension fund and all your eggs are in the US basket, and you have nothing in it,” said Jim McCafferty, head of equity research in Asia at Nomura in Hong. China, it’s a skewed portfolio. Kong.

“As soon as we saw US stocks start to underperform and Chinese stocks, which are of course cheap by all valuation standards, start to outperform – that’s when I think investors will start to agitate.”

(1 dollar = 6.3441 Chinese Yuan)

(Editing by Vidya Ranganathan and Kim Coghill)

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Bobby Allyn

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