Turning positive on China equities

WHAT a difference a week makes. After a more than 40 per cent decline in the MSCI China Index (MXCN) since we turned neutral a year ago, and a week after we suspected that we might have crossed the point of "peak bear", we finally see light at the end of the tunnel. A key, much-awaited policy shift has given us the signal we need to turn overweight on China equities.

Notwithstanding the immediate rally in reaction to the Chinese government's announcement, Chinese equities still remain attractively valued. The policy developments suggest both the economy and the MXCN are set to turn the corner and will likely see strong outperformance in the quarters ahead, in our view.

While we recognise that external geopolitical uncertainties and the domestic problems of Covid-19 and property sector deleveraging all still create meaningful headwinds for China's equity market, the move to inject stability into the domestic regulatory environment is likely to have the larger - positive - impact by some distance.