DBS chief investment officer Hou Wey Fook admitted that the bank’s overweight call on Chinese equities in 2022 was premature but maintains the view with even greater confidence in 2023 due to a reopening and more.

Throughout 2022, Chinese equities remained a major headline risk in portfolios due to ongoing Covid restrictions, property challenges, a tech crackdown, geopolitical tensions and more. According to DBS, a rebound in markets would require the country to fulfill the «three C’s»: cheap valuations, clarity on geopolitics and catalysts for positive momentum.  

But despite China achieving just one of the three criteria – cheap valuations – DBS was positive on the market last year, calling it a «strong value play» in early July, right before a four-month decline to new lows.

«I will admit we were a little early to make the call to be overweight on China stocks,» said DBS CIO Hou Wey Fook in a recent webinar attended by finews.asia.

Three C’s Now Achieved

According to Hou, DBS will maintain its overweight call on China in 2023 as it had recently achieved all three of the bank’s criteria for a sustainable market rebound.

«On clarity, while the undercurrent between US and China will remain for a long, long while, it is encouraging to see some degree of de-escalation of rhetoric and some degree of rationality in relation to the understanding of the balance between strategic competition and collaboration,» Hou explained. 

«On catalysts, we are now seeing a fully fledged reopening of the economy as well as the government’s supportive measures for the property sector.»

October 2022: Market Bottom

Given the recent rally, Hou noted that some consolidation could be due but he underlines that October 2022 will mark the market’s bottom due to the achievement of the «three C’s». 

Nonetheless, there are still downside risks in Chinese equities, most notably the potential for the Covid infection count to stay high and a disappointment in corporate earnings. On the former, DBS noted that this risk is partially mitigated by pent-up consumer demand and a weakening virus. And on the latter, the bank said that this downside is likely to have been already priced into markets.

«The risk-reward for Chinese stocks looks enticingly attractive at this stage,» Hou reiterated.