China: Recent equity sell-off offers an opportunity to buy – Morgan Stanley

Worries over China’s growth path and monetary policy have recently hampered equity performance, but investor concerns may be overblown, according to Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, who believes the recent equity sell-off may be an opportunity to add selectively to China allocations in portfolios.

Key quotes

“Rather than weighing on Chinese companies’ cost of capital, rising US real yields and inflation expectations actually help to stem the dollar’s weakness against the renminbi, a potential positive for Chinese exporters.”

“Pent-up demand and excess household savings in China could drive 8%-10% growth in consumption over the next two years, according to Alpine Macro, an independent research firm.”

“Massive stimulus and deficit spending in the US, Europe and Japan, while implemented to counteract the pandemic, may lead to a dreaded ‘fiscal drag’ on these economies once they run down. That’s less of a concern in China, where the government’s one-time stimulus to counter the pandemic amounted to only 1.5% of GDP – compared to as much as 30% spread over multiple policy moves for major developed nations.”

“Concerns over more restrictive monetary policy in China may also be misplaced. Unlike in the US, China’s real yields have already moved in solidly positive territory, which may obviate the need to raise rates anytime soon. Meanwhile, nationwide stockpiling of oil last year should partially insulate China from higher energy prices– and inflationary pressures – in 2021.”