While China’s zero-COVID policy has been successful from a public health perspective, the economic and social cost has been significant.
Two weeks ago, China’s government published a list of 20 measures designed to “optimize” mitigation of COVID, marking a significant change in direction of policy towards living with the virus and away from zero tolerance for cases, Matthews Asia investment strategist Andy Rothman wrote in a recent insight.
Now, investors in emerging markets strategies are wondering what impact this policy shift might have on their investments.
“Investors should understand that the path to the end of lockdowns — critical for a full economic recovery — will be bumpy, especially as COVID cases are on the rise in China,” Rothman wrote. “There will be more lockdowns in the coming months as well as reports of local officials failing to follow the new policy guidance.”
Rothman said economic data is likely to remain weak through the winter as a result. “The end of lockdowns is not likely until the spring, which should be followed by a gradual economic recovery in the second half of the year,” Rothman wrote.
Under zero-COVID, families and companies have been reluctant to spend due to fear of lockdowns. Alongside, growth has slowed and unemployment has risen, especially among young people.
Due to this, China is likely to remain the only major economy engaged in serious financial easing while much of the world is tightening, Rothman said.
“Chinese households have notably been in savings mode since the start of the pandemic with family bank balances up 42% from the beginning of 2020,” Rothman wrote. “Those funds should fuel a consumer rebound in China and a recovery in mainland equities, where domestic investors hold about 95% of the market.”
Investors looking to gain exposure to China should consider the Matthews China Active ETF (MCH). MCH is a high-conviction equity portfolio that seeks companies benefiting from China’s domestic consumption. MCH uses an all-cap fundamental GARP approach driven by proprietary research and combines long-term core holdings with more opportunistic ideas to provide consistency through cycles.
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