[GENEVA] CHINESE equities suffered a heavy blow earlier this year, with investors – spooked by China’s zero-Covid stance and mounting geopolitical tensions – dumping them at record pace.

But some wealth managers have since reaffirmed their bullish stance on the country’s stocks. Lombard Odier is one of them.

The Swiss private bank is holding its 2.1 per cent overweight position on Chinese equities, which now make up 4.3 per cent of its portfolio.

In comparison, its allocation to European stocks is 1 per cent underweight, at 8.9 per cent, while that for US equities is 1.2 per cent overweight, at 14.2 per cent.

The bank describes its overall positioning in equities – which make up 45.2 per cent of its portfolio – as “neutral exposure with protection”.

Speaking at a media event in Geneva on Sep 1, Lombard Odier’s chief investment officer Stéphane Monier said the bank initiated a long position on China in May vis-a-vis the rest of the emerging markets in the second quarter.

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This “initially worked very well”. By mid-July, he said, Chinese equities were up 4 per cent while emerging market equities were down 10 per cent, and world equities down 3 per cent.

By early September, Chinese stocks were still outperforming by 6 per cent, posting flat performance against emerging market equities, which were down 6 per cent, and world equities, which were down 2 per cent.

“We’re still somewhat close to these numbers,” Monier told The Business Times.

“The key driver of the initial outperformance was growth recovery gathering steam on more stimulus and economic reopening. Since then, new Covid-related lockdowns were announced (Chengdu and others), and real estate concerns have come back to the fore. Further stimulus measures by authorities have cushioned the impact to a certain extent.”

The bank’s executives acknowledged China’s dismal growth numbers in the first half of the year. But they are counting on the government’s fiscal support as well as “hints” of a pragmatic turn in its public health policy.

“There has been a little bit of a pullback more recently because people were becoming more worried about the signs, from an economic point of view, that the Chinese economy was not doing well. But we do expect the monetary and fiscal measures that the government has taken to improve the situation,” Monier said.

Chief economist Samy Chaar said the second half of the year “has to be better” for China because of political factors.

The Chinese Communist Party will hold its 5-yearly national congress in October, where the country’s president Xi Jinping is expected to secure a third term that will cement his position as China’s most powerful leader since Mao Zedong.

“(This would be the) first time a Chinese president gets to be reelected by the party, and they had to change the rules for that. So it’s pretty clear it has to go well, no?” Chaar said.

China in 2018 eliminated presidency term limits, paving the way for Xi to rule indefinitely.

Chaar noted also that China has stepped up economic stimulus to spur growth, at a time when most countries are paring down.

“(It is) unacceptable for the Chinese authorities to have such a growth momentum… So they are cutting rates, they are injecting credit, and they’re doing a lot on the fiscal front,” he said.

Comparing China’s present situation with the 2008 recession in the United States – both sparked at least partly by property market woes – Chaar noted that while the US was in deficit then, China has a substantial current account surplus. Chinese households tend to have excess savings, and its banks are better-capitalised than US banks were at the time, so they are likely to be better able to absorb economic shocks and therefore be able to avoid systemic crises.

While China still maintains a strict zero-Covid stance, Chaar said the country has allowed some production to resume. He pointed to the World Container Index as a proxy for how shipping conditions have normalised. According to the index, which provides weekly assessments of container freight rates, the cost to ship a 40-feet box from Shanghai to Los Angeles has fallen to about US$6,000 in July 2022 – about half the cost in September last year.

While US-China geopolitical tensions are a concern, the bank does not expect to see a drastic rift unfolding between the 2 jurisdictions in the next 6 to 12 months.

“Right now, we don’t think that the US economy can operate without the Chinese economy,” Monier said.

“The situation with China is that they are an economy that represents 16 or 17 per cent of the world’s economy. From trade, the Chinese corporates will generate revenues and earnings in that proportion,” he added. “This is a pool of earnings that if you want to ignore, you have to have a very good reason for that.”