Feng Shui, the traditional Chinese practice of harnessing the flow of energy, indicates the Year of the Rabbit can pull people in different directions. For 2023, we may well see investors getting pulled in opposing directions, as hope and delivery could be at opposite ends of the year.
It is hoped Chinese consumption will recover
A surge or “revenge spending” in the initial phase of economic reopening, followed by a slower pace of growth, has characterized the pattern of post COVID-19 consumer spending in emerging markets. The slowdown was due in part to rising inflation and higher interest rates, which crimped real purchasing power.
China is expected to follow a similar pattern of post-COVID consumption, with consumers enthusiastically pursuing “revenge spending” in the Year of the Rabbit. An estimated RMB 6.6 trillion in excess savings has been built up during three years of zero-COVID policy, which should in part act as a driver.
The key question is what happens after the initial phase of reopening and whether increased consumption will translate into higher earnings in the corporate sector. Inflation is forecast to remain subdued in China during the Year of the Rabbit, partially due to the decline in energy prices from their peak, the stable domestic supply of agricultural commodities and sourcing commodities from Russia, which has emerged as a pariah state in the developed world. As such, Chinese purchasing power is not expected to weaken.
Corporate earnings should deliver, eventually
From a corporate earnings perspective, the near-term outlook remains weak as companies struggle to scale up production and distribution in the face of COVID-19 pandemic. Additionally, the outlook for the real estate sector is lacklustre, and credit demand may take time to recover, which is likely to act as a drag on the financials sector. However, we expect earnings to recover in the second half of the year as supply chain issues are addressed and the real estate sector stabilizes.
One of our areas of focus is on the electrification of transportation, which includes batteries used in electric vehicles. The structural outlook for this sector remains positively charged.
Market outlook is positive, but uneven
After ending its zero-COVID policy, China embraced economic reopening despite the societal costs. Policymakers have gone out of their way to bolster external relationships, (e.g., with Australia) and rolled out policies to mend the economy (e.g., in the real estate sector). However, the cost of capital remains elevated, partly due to higher rates in the developed world and state crowding out of the private sector domestically. In addition, weak demographics in China need to be addressed. Renewed freedom of movement combined with incentives to start a family could help reverse recent data showing a contraction in the population. China has the largest weight in emerging market indexes and has strong trade links with other emerging markets. A strong and recovering Chinese stock market should be good for emerging markets.
Leadership in a multi-polar world
The world leaders of the current generation are powerful, and their authority seems to be unrivalled. However, many of these leaders have strong agendas which have resulted in turmoil and conflicts, such as the Russia-Ukraine war. Persistently high inflation in Turkey creates risks for President Erdogan as he prepares for elections in June of this year. State elections in India later this year could give an indication of how President Modi and his BJP party will perform in national elections in 2024. The Year of the Rabbit is likely to see world leaders continue to re-balance global power, and we expect governments in the developed world to also court other countries. The world still awaits a Jade leader.
What it means for investors
Given the steep declines in emerging markets in the latter months of 2022 and a strong start to the year, the Year of the Rabbit may well require investors to be flexible and opportunistic. Argentinian football player Lionel Messi was born in the Year of the Rabbit, and we are hopeful that in the year ahead, emerging markets will perform as well as Argentina did during the 2022 World Cup.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.