Julien Holtz, Emerging Market Strategist Pictet Wealth Management.

• The Chinese economy will likely rebound in 2023, as the government has pledged to prioritise growth and restore confidence after three years of ‘zero-covid policy’.
• Economic activity has shown initial signs of recovery since last December thanks to re-opening. We will likely see a revival in domestic consumption from the persistently muted levels of the past three years, partly offsetting the drag from slowing exports, while China’s property sector will likely stabilise on more policy support and improved household confidence.
• Although the accelerated re-opening process may mean a quicker economic than we previously expected, the strength of China’s recovery remains to be seen. Macro policy will likely continue to be supportive with additional rate cuts and government debt issuance—but the space for large-scale stimulus is limited.
• Several waves of negative events impacted sentiment towards Chinese equities from 2020 onwards, leading to a major bear market for offshore and onshore indices. However, the main negative drivers are rapidly fading, with the lifting of China’s zero-covid policy a major catalyst for the recent rebound.
• While valuations of Chinese equities (especially offshore) have sharply rebounded since last November, they remain relatively neutral (on a sector-adjusted basis in particular). We therefore see room for further expansion, if not an overshoot.
• Earnings revisions remain negative overall, but upward revisions in a rising number of consumer-related and other sectors bodes well and should further support market performance if it persists. We also note that earnings growth expectations in China are among the highest across emerging markets.
• Our preference goes towards offshore indices due to their higher consumer exposure, light positioning and still-low relative valuation premium vs A shares.
• We are raising our 2023 year-end target for the MSCI China to HKD 76, which implies a total return of 7% (in USD) based on current prices.