Has the storm passed for China’s A-share market?

OVER the last 12 months, China has been subject to some very negative sentiment. At the end of 2021, investors were still reeling from the “common prosperity” push and the first half of 2022 has also been tricky, thanks to the draconian approach to Covid outbreaks. At the end of April, the MSCI China A Onshore index was down 23.4 per cent, it has since made up some ground rallying in June, but is still down 13.3 per cent year to date.

After this difficult period for Chinese markets, A-share valuations are not demanding. The forward price-earnings ratio of the MSCI China A Onshore index is 14x, which is below its 5-year average of 15x2. With valuations looking reasonable we believe things look brighter for China in the rest of 2022, from a top-down perspective.

Let’s start with inflation. Here China stands out. While all other major economies are battling rapidly rising inflation, with a pace of price rises not seen since the 1970s, Chinese inflation has been muted. This is not surprising after the Chinese economy contracted in the second quarter. Activity is just now getting back to normal. But even so, core inflation has risen only modestly since January, running at 1.2 per cent annualised .