Investment Strategists at Bank of Singapore Still Favor Chinese Equities

By Nick Hedley

Despite the economic damage caused by China’s “zero COVID” policy, Bank of Singapore’s investment strategists remain optimistic about the outlook for equities in the world’s second-largest economy.

The private banking arm of OCBC Bank, Bank of Singapore is maintaining a defensive approach to global asset allocation – but sees China as a potential bright spot.

“We remain overweight on Chinese equities as we continue to see positive long-term risk-reward given distressed valuations which we believe has priced in significant negatives,” Eli Lee, head of investment strategy at Bank of Singapore, said in a note.

The U.S. and China recently agreed to preliminary audit measures for Chinese companies listed on U.S. exchanges, “which signals in our view that China is not keen on a complete economic decoupling from the U.S.”

There was previously a risk that Chinese groups would have to de-list from U.S. exchanges due to concerns around audit controls and transparency.

And while Beijing’s zero COVID policy is a constraint on growth – the city of Chengdu was recently placed under lockdown – Bank of Singapore believes policy changes could be made after the Chinese Communist Party’s congress in mid-October.

“Policymakers are cautiously monitoring the risks of a systemic crisis from the housing slowdown, and China’s credit cycle broadly remains in an upturn,” Lee said.

Officials are paying close attention to the rapidly weakening labor market situation and will probably act if needed, Lee said. They have already provided some support.

On August 24, the State Council announced a new round of fiscal stimulus measures, including support for infrastructure projects, power generation, and for the housing market. And the People’s Bank of China recently delivered a small reduction in interest rates.

However, some investors are not convinced, partly because of ongoing geopolitical tensions.

In a blow to Nvidia and other tech groups, the U.S. government recently imposed new export restrictions on high-end computer chips to China.

“Unfortunately, this is what happens when trade wars and anti-globalization tendencies are the order of the day,” South African wealth manager Vestact said in a note to clients. “Superpowers have political agendas and private companies are caught in the crossfire. We'd prefer to live in a world where international cooperation on technology is assured, but that seems to be unrealistic.”

Vestact said Chinese stocks were losing their appeal.

“Early backers of giants like Tencent, Alibaba and BYD are taking money off the table. The thought of president-for-life Xi Jinping forever is not all that appealing.”