Dim outlook for Chinese equities

As China’s role in global markets grows, the risks for investors also become greater.

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“Almost every year, China becomes a more and more important part of the global stock market,” said Amber Sinha, senior portfolio manager of global equities at CIBC Asset Management, in a Sept. 9 interview. 

Unfortunately, the outlook for investors isn’t good, Sinha said. Covid-19 lockdowns receive most of the headlines but, according to Sinha, two larger trends will have a bigger impact on markets: technology and housing. 

Large-cap technology companies have played a significant role in the modernization of the Chinese economy, Sinha said. Until recently, the government took a relatively hands-off approach. That no longer seems to be the case.

“It’s pretty clear technology is no longer seen as an enabler by the government, but something to [keep] tabs on,” said Sinha. 

Regarding the housing market, Sinha’s concerns go beyond the mortgage crisis. 

Housing has been the go-to investment for a lot of people in China, he said, and for good reason. It has been an effective vehicle for the government to increase or decrease stimulus in the economy. But, given the damage in the housing market, Sinha said the system is in trouble.

“I don’t think housing can be the go-to vehicle to get out of problems going forward like it used to be,” he said.

Further, every year there’s less and less opportunity to add infrastructure, he said, “unless you are literally building bridges to nowhere.”

Market confidence in the Chinese government hasn’t seemed to waver, he said, as many investors hold the view that a Communist country is more capable of intervening to stimulate the economy. But Sinha said the government is less capable of handling crises because they’ve never had to do it before.

“Covid is a good example where they’re doing something that’s completely unique in the whole world, and to me it’s a sign of not being able to manage this crisis the way it should be [managed],” he said. 

Even with large declines in the Chinese market, Sinha isn’t convinced of the broad opportunity for investors. 

However, he said elements of the Chinese growth story are still intact. One is the Chinese middle class and the steady rise in income. Another is the government’s commitment to invest in clean air and clean water.

The Chinese government is also intent on building national champions in certain industries that can compete globally: in electric vehicles, for example.

“That’s where we are spending our time, as opposed to just generally buying what comes across first in China, which is the tech stocks or housing stocks,” he said.

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