Chinese stocks can withstand stagflation risks

Chinese equities may stand out amid potential global market jitters caused by stagflation risks, thanks to lower inflationary pressures in the nation, supportive macroeconomic policies and reasonable market valuations, global asset managers said.

Their remarks came as geopolitical uncertainties inflamed surging commodity prices while tightening by major central banks risks cooling down the global economy. The convergence of the two factors raised the possibility of global stagflation-a dreaded condition where high inflation accompanies slow or even negative economic growth.

Stagflation risks could weigh on stock assets by eroding corporate earnings and dampening valuation levels. Chinese equities, however, seem to be better equipped to withstand the potential shock of stagflation than many peers, they said.

Underpinning their assertion has been China's overall mild consumer inflation and accommodative policy stance that could send its economy to a new up-cycle this year, meaning China faces a lower risk of stagflation than many other economies.

"Although stagflation will be detrimental to all risk assets, we think Chinese equities are better positioned," said Zhou Ping, Neuberger Berman's director of quant investment in China.

China's inflationary pressure is among the lowest among major economies with reliable supply chain capacity, while its policymakers are determined to make full use of tools available to support the economy, Zhou said.

While the US growth in consumer price index hit a four-decade high of 7.9 percent year-on-year in February, China's CPI growth stayed mild at 0.9 percent in February, the same level as January, official data showed.

The Chinese government has reiterated its determination to guide the economy through headwinds, with a stronger-than-expected annual GDP growth target of around 5.5 percent lifting market expectations of supportive policies.

A recent meeting of the State Council's financial stability and development committee called for proactive monetary moves after China reduced the one-year loan prime rate, a benchmark lending rate, by 15 basis points in December and January, to 3.7 percent.

"China faces less inflation pressure than the West and recently cut rates with room to move further," said Eric Bian, investment strategist at Wellington Management. "In 2022, China might surprise again as an uncorrelated economy and asset class as its economy could start an up-cycle at a time that tightening policy and inflation make the rest of the world look vulnerable."

Reasonable valuations after recent market corrections also provide Chinese equities with a buffer against potential stagflation risks, experts said. The price-to-earnings ratio-a key valuation multiple-of the benchmark CSI 300 Index had dropped to 12.46 as of Wednesday, slightly above the 10-year median of 12.33, said market tracker Wind Info.

"Current valuations have priced in negative factors such as global central banks' tightening and risks of stagflation," said Meng Lei, China strategist at UBS Securities. "Overall, we remain constructive toward Chinese equities this year."

Though global stagflation risks are unlikely to hammer the whole asset class of Chinese equities, experts said the risks could still have some structural impacts. Some midstream and downstream listed companies with limited pricing power and considerable exposure to raw material costs could feel some pressure on profit margins, Meng said.

The rise in commodity prices could also hurt the consumer discretionary sector by impairing the purchasing power of consumers and weigh on the valuation of tech stocks by fueling inflation, said Zhou from Neuberger Berman.

Companies whose profits are positively correlated to commodity prices could benefit though, Zhou said, citing energy and material sectors, which have recorded the best performances so far this year.

An index tracking energy A-share companies registered a year-to-date gain of 12.82 percent to 3199.08 points as of Wednesday, versus a 13.69-percent loss of the CSI 300 Index over the same period, according to Wind Info.