Variety of growth stocks underscores China’s short-term strength

Growth opportunities are not in short supply in China, says Arup Datta, head of the global quantitative equity team at Mackenzie Investments.

Datta said China has a wealth of growth names in a variety of sectors, making the economy extremely attractive to international investors.

“Many countries have growth potential in one particular area or another,” he said. “But China is closest to the U.S. in having growth stories everywhere.”

Datta expects China’s strong companies to contribute to global economic growth this year as the country emerges from Covid-19 lockdowns, grows its domestic consumer market, increases exports to its trading partners, and resumes international travel.

“China’s economy will definitely lead to global growth,” he said. “China will play an offset to the slowdown that central banks throughout most of the world are leading the charge on. This year and next is, to some degree, China’s story.”

He said China’s strong anti-Covid policies forced a contraction in exports in recent years, which was a boon to emerging economies like Vietnam and India.

“Now with the reopening of the economy and a very fast recovery, I believe China will regain some of its lost export growth, at the cost of these other markets,” he said.

As for China’s own economy, Datta said the IMF’s forecast of 5% growth in 2023 seems to be a reasonable guess.

“I’m very comfortable with that number. Five percent is a step up from last year, where China grew only by 3%,” he said. “My view is that demand for commodities will go up, but not at the breakneck pace of the 2000s, when China growth was really crazy. Real estate was going crazy, and there was a lot of demand for commodities. I would say you will see a slower version of that.”

Datta said any way you look at them, Chinese equities look attractive, and they have for some time.

“That’s one of the metrics I look at if I want to invest for the long run,” he said. “My own outlook for the China market in the short term — and I’m defining short term as the next couple of years — is very strong, because the Chinese government is doing everything it can to reopen the economy. They had an about-face on their strong anti-Covid lockdowns. They want to make their 1.3 or 1.4 billion people happy. And as a result, all the impetus is for China economic growth to really take off in the next couple of years.”

The only caveat to that, he said, would be if the government resumed its “common prosperity” policy of penalizing the perceived self-interest of tech bellwethers like Hangzhou-based Alibaba Group Holding Ltd. and Shenzhen-based Tencent Holdings Ltd.

“I think the regulation against those companies has definitely come to a standstill. That is not happening anymore,” he said. “Now, has that focus changed for good? If so, that’ll be great for the equity markets. If it’s still in the back of their mind, and they emphasize it to some degree, that’s still fine. But if they emphasize that fully, at the expense of everything else, that’s where the long-term view may not be as rosy.”

Overall, Datta is a booster of China, pointing out it has the second-largest economy in the world, a huge consumer base, a growing middle class, strong export potential, and cheap valuations.

“People should have exposure to China,” he said. “I believe, especially in Canada, people are underinvested in emerging markets and China. And maybe that was the right place to be in the last decade, where the North American market — especially U.S. — did very well. [But] in the next few years, one should have exposure to the Chinese equity markets. It’s cheap and the catalyst is there for the China equity market to do well.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.