FIS Singapore 2024

Further Chinese equity market declines ‘unlikely’: Pictet chief economist

Patrick Zweifel. Photo: Jack Smith

Pictet’s Geneva-based chief economist Patrick Zweifel remains bullish on the outlook for China, suggesting that stabilization of macro factors and “promising cyclical development” will breathe life into the market of world’s second-largest economy.  

The comment came amid a particularly weak stretch for the Chinese equity market. The MSCI China Index return was down close to 14 per cent in the past year as at the end of February 2024, compared to a 9.2 per cent gain for the MSCI Emerging Markets for the same period.  

But at this week’s Fiduciary Investors Symposium in Singapore, Zweifel said he remains confident in China amid fluctuations because the country never really lost sight of its end goal.  

“China has always wanted to be part of the global economy, and wanted to internationalize its currency, which was pretty much its ultimate goal,” Zweifel told the symposium.  

“I always analyze China in relation to that goal, which hasn’t really changed.” 

Zweifel said a prerequisite for achieving that goal is for China to stabilize its currency and inflation, which in turn created a favorable environment for bonds. He pointed out that Chinese bonds have by far outperformed their US counterparts.  

“The problem was [the] equity market – they just didn’t care about it,” Zweifel said. 

“But I’ve always again thought that it would start to matter as soon as the equity market themselves starts to challenge this ultimate goal of internationalizing the Renminbi. 

“And I think we’re just right there. Everyone has lost confidence in the equity market, and they are currently doing everything to reform and boost investor behavior – not only domestically but internationally – to rebuy in that equity market.” 

Stabilization ahead 

According to a Pictet analysis, the main macro factors behind Chinese equity fluctuations (construction activity, home prices, world real export, trade-weighted USD and commodity prices) are largely still real estate indicators.  

“Even if we don’t know exactly the future of the real estate market in China, most of the correction is actually behind us, and we would expect some sort of stabilization going ahead,” he said.  

“It’s unlikely to have further decline on the Chinese equity market linked by that factor.” 

Meanwhile, “promising cyclical development” such as inflation growth is moving into positive territory and will in turn propel nominal GDP growth, Zweifel said. This, combined with an ongoing government reform that aims to make state-owned enterprises more friendly to stakeholders and distribute more profit, will likely lead to earnings growth.  

There is ongoing debate in the industry about whether emerging markets can technically be classified as an asset class. Zweifel was of the view that it is, but a highly heterogeneous one.   

He recommended three ways of considering emerging market countries for investment, the first one being commodity exporters versus manufacturers; the second one being debtors versus creditors; and the third being China versus the rest of emerging markets, due to the sheer size of its economy and heavy dependence on domestic factors.  

“It makes very much sense to be active [in China],” Zweifel said. 

“It makes especially more sense to be active in economies that are very rapidly changing structurally. 

“I mentioned that past performance of China was highly linked to real estate market – I don’t think that the future in China will be a real estate market. 

“They have rebuilt pretty much everything. The future is… high tech – AI, lithium battery, you name it. You need to be active and forward looking to be in those in those countries.” 

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