Fans of schadenfreude will be aware of the homemade dilemma currently facing Chinese policymakers, just as investors will be trying to play it.

Thanks to the Chinese Communist Party’s (CCP) unwavering application of a zero tolerance approach to COVID-19, the Middle Kingdom came out of 2020/21 smelling like roses – with a hint of hand sanitiser – as the only major global economy to expand.

The world’s second largest economy absorbed some extraordinary shocks in the process – with the reining in of its homegrown tech titans, the slow motion collapse of a legacy property sector corrupted by its own magnitude… and then there’s the muzzling of Hong Kong. But a sample of China’s challenges.

But with Shanghai in tight lockdown and COVID-19 cases surging as restrictions weigh on economic activity, decision makers and investors alike are facing a helluva crossroads (and with Beijing itself at a crossroads) – either stimulate economic activity aggressively or abandon the zero-tolerance policy and ease restrictions.

Chinese equities champion, Antipodes’ portfolio manager Sunny Bangia says – fundamentally – Chinese equities continue to offer ‘compelling opportunity sets’ for investors, despite the frailties borne out in the headline valuations of Chinese companies over the past 12 months.

“If you take a medium to longer-term approach, the opportunities in China haven’t changed.

“They’re still very much the same opportunity sets that have always existed,” Bangia told Stockhead.

“There is a trade-up occurring in the consumer. There are interesting things happening in terms of decarbonisation and the industrial part of China, and we feel very positive on many of those developments.”

Bangia said a change in rhetoric and policy from the top echelon of Chinese Government should also boost confidence.

“While short term policy has been tight, now it looks to be moving the other way.

“Vice Premier Liu He has talked about more direct action in terms of supporting the real economy, discussions about managing the property developer risk and creating financial stability in the property market, and to arrest some of the declines we’ve seen there.

“We also have the 20th Party Congress Elections at the end of this year where the current administration will be re-elected. The Party has an incentive to boost economic activity and we have seen that through tax cuts in the small to medium enterprise segment.”

The Antipodes playbook

Bangia said Antipodes has trimmed some exposure to Chinese internet platforms, while it has increased exposure on Chinese domestic cyclical businesses that will participate in an economic rebound, including travel and property related exposures.

“There has been a big de-rating on Chinese stocks and there’s been a large repricing of equity risk premia in China,” Bangia says.

“So, we do see that the current valuations are not factoring in much potential upside for policy change or economic stabilisation – which we are seeing evidence of.”

But Monday’s data releases were mixed…

China’s surprise first quarter GDP growth – up from 4%  to 4.8% year-on-year – certainly beat expectations of 4.2% y/y.

But fixed assets investment growth slowed to 9.3% y/y in the first three months of the year from 12.2% in January and February, a beat on estimates. But creepingly timid domestic demand has retail sales down by 3.5% y/y in March, well below the anticipated 3.0% y/y decline.

China gdp equities
BCA Research

“There’s the waylaid property sector – still absolutely fragile – with Q1 sector investment slumping to 0.7% in Q1 from 3.7%, while residential property sales crashed by over 25% for the year so far.

“BCA Research says these multi-speed numbers highlight that COVID-19 lockdowns are a drag on Chinese economic activity at a time when private sector sentiment is already depressed and demand for housing is weak.

“These forces will continue to have a negative impact on the Chinese economy over the near-term unless Beijing relaxes its COVID-19 policies or stimulates the economy more aggressively.”

The CSI 300 closed 0.5% lower on Monday following the data release, bringing year-to-date losses down to 16%.

“We expect Chinese stocks to continue to face downward pressure over the coming months as authorities restrict activity in an attempt to control the spread of the virus,” BCA said.