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Macroeconomic headwinds such as fallout from Covid-19, a conservative fiscal policy, global inflation, and the impact of deglobalisation and nearshoring around the world have taken their toll on the world’s second largest economy.
The Chinese government have said its economy is recovering. However, the nitty gritty isn’t aligning with this rhetoric, and investment teams at insurance firms would do well to pay attention to the numbers despite the lofty fluff of unfulfilled predictions.
“From a sector standpoint, it will depend on the macro performance in 2023,
hence our efforts to seek out quality companies.”
After a volatile year, industry leaders are saying that the macroeconomic battering of 2022 is poised to take a turn in the right direction due to the reopening of the China/Hong Kong border, easing of stringent Covid-19 policies, and momentum in the Asian credit market.
It remains to be seen just how this optimism will play out.
The long-term outlook for China is challenging – given geopolitical tensions and negative structural growth – but its reopening could be a “significant near-term opportunity”, said Manuel Rodríguez López de Coca, Equities Manager at MAPFRE AM, the Spanish insurer’s asset management arm. “From a sector standpoint, it will depend on the macro performance in 2023, hence our efforts to seek out quality companies that are theoretically better protected,” he added.
López de Coca’s cautious optimism is not unusual – it’s a sentiment echoed by many insurance investment teams – but it still rings slightly hollow in the short-term, especially given weak 2022 investment earnings. One such case in point is Ping An Insurance Group, the country’s largest insurer, which just saw its 2022 net year profit fall 17% compared to 2021.
“Insurers might seek a higher investment yield by allocating a portion of
their invested assets to nonstandard fixed-income type securities."
Whilst Fitch Ratings’ China Life Insurance Outlook for 2023 cautioned that investment risk remains key, and they expected insurers to manage their investment risks carefully under Phase II of the China Risk-Oriented Solvency System (C-ROSS II) – implemented by the China Banking and Insurance Regulatory Commission (CBIRC) in Q1 2022 – they also said they were not predicting any significant deterioration in regulatory risk-based capitalisation. “Fitch expects the life insurance sector to gain top-line growth momentum and recovery of consumer sentiment on a gradual relaxation,” the report said.
Fitch said that, especially in the near future, a key earning source for Chinese companies will be the stable investment yield provided by fixed-income instruments. “Insurers might seek a higher investment yield by allocating a portion of their invested assets to nonstandard fixed-income type securities, while we believe that exposure to non-standard fixed income securities are unlikely to increase,” the analysis continued.
As economic activities pick up, markets will need time to recover from macroeconomic volatility due to Covid-19 fallout and global inflation – and don't seem to be making a rapid or unprecedented comeback any time soon.
This uncertain duration of the recovery period means that conditions most likely favour long-term investors.
“The macro picture is generally improving for Asia ex-Japan," said Kelly Chung, Investor Director, Head of Multi-Assets at the Hong Kong-based asset manager Value Partners Group. "With inflation in Southeast Asia getting better, rate hike pressures have become milder. The softer US dollar and Treasury yields are positive to Asia ex-Japan equities. There are continuous inflows toward the region," she added.
Chung's comments about continuing momentum are cautiously sanguine – and not unexpected. In her view, foreign investors are still underweight in the country. “[They] are waiting to see further improvement in economic data and company fundamentals. There are significant potential inflows to the China/Hong Kong market when long-only investors start to close the gap of their underweight,” she continued.
"Foreign investors are starting to narrow the underweight in
emerging markets with reallocation from the US."
She remained relatively optimistic that markets would pick up shortly, especially with what she saw as upcoming reallocation by global markets – specifically the US. “In Hong Kong, economic activities are also picking up but still need time to recover. With the full reopening of China, Hong Kong will continue to benefit from China’s economic recovery.”
Chung added that: “The softer US dollar and Treasury yields are positive to emerging market equities. Foreign investors are starting to narrow the underweight in emerging markets with reallocation from the US.”
When it came to enhancing China’s attractiveness to foreign investors, Xiaolin Chen, Head of International at China-focused ETF provider KraneShares, noted that an emphasis on implementing equal treatment for public and private capital would help – increasing foreign investment and promoting export growth.
Above all, she said, restoring market confidence was key for international investors to recognise what she saw as immense investment opportunity in China. This confidence boost mainly rested on the March announcement of the GDP growth target and fiscal policy: “A meaningful fiscal policy and proactive monetary policy would put the country back on track to deliver the growth target.”
However, China’s cautious 2023 growth target – announced last week as just about 5%, the lowest it has been in decades – has a chance of hampering this much-needed shot of confidence, as well as sidestepping the also necessary boost to the global economy it was expected to provide.
China's new Premier Li Qiang, a close connection of President Xi Jinping and in charge of the country's economic renewal, said that recovering investor confidence is the primary focus. "During a period last year, there was some incorrect opinion on the development of the private economy which worried some entrepreneurs," said Li, in a report from the BBC. "The environment for the private economy [will] get better and better and there [will] be more space for it," he added in an attempt to assuage concerns.
"Credit spreads in US investment grade bonds further tightened, making
Asian investment grade bonds continue to be attractive."
Whilst stabilising growth could be a significant challenge going forward, some see the modest GDP target as pragmatic – a shift from an agenda of rapid growth – at least until momentum increases and interest returns. GDP growth for 2022 came in at just about 3%, down from 2021's 8.1%, said research from The World Bank.
Chung was particularly hopeful about the Asian credit market, which she said was seeing strong demand due to global conditions improving. "Credit spreads in US investment grade bonds further tightened, making Asian investment grade bonds continue to be attractive. With the market expecting the rate hike cycle closer to the end, investors are extending duration."
However, given the long, complicated road to get back to where things were pre-pandemic, investors’ supposed optimism feels like hot air. Turbulence remains – and investment teams should keep their eyes on the details without getting caught up in the rhetoric.
With a GDP of $17.7 trillion and rising, China remains the world’s second largest economy going into Q2 2023, however, actions do seem to speak louder than words. Markets took a hit during the Covid-19 pandemic and have yet to recover.
