Watson Li is the CIO, Head of Equities at Shenzhen-based Ping An Fund Management Company, a UOBAM and Ping An Trust joint venture. During Watson’s recent visit to Singapore, Paul Ho, Senior Director, Asia Pacific Equities at UOBAM, asked him for his expectations of the China market in 2023.

Paul: Hello Watson, thank you very much for your time. It is good to have you here again to share with us your views on China. What is your outlook for China in 2023, and how are you positioning your portfolio for that?

Watson: We all know, in 2022, the market was quite volatile. But I think, because China has reopened the market will recover from the bottom in 2023. So, I am optimistic about the market.

For my investment portfolio, I have two parts. The first part is the growth sector. The second part is the security sector.

For the growth sector, my portfolio consists mainly of high-tech stocks in electric vehicle (EV), solar, and new energy sectors. As for the security part, we are mainly in China’s domestic consumption upgrade sectors.

Paul: China has been in the news quite a lot, and one of the big issues that has come out time and again is China's real estate problems. Do you think that will be a problem for us in 2023? Or do you think that the problem has been largely resolved?

Watson: I think most of the problems have already been solved, because the Chinese government learned a lot from Japan and Hong Kong.

During the past few years, the leverage ratios of some big real estate companies was quite high. So, it was quite dangerous. The Chinese government saw the problem and have been trying to resolve it since 2021.

In 2022, some big companies, such as Heng Da, went bankrupt. But recent market figures like second house sales have risen a lot, even 20 percent to 30 percent in most of the provinces. In the second half of this year, new house sales may also recover from the bottom. So I think confidence has come back, and most of the problems are already resolved.

Paul: The other issue that is top of mind for a lot of investors is the geopolitical issues faced in China. Especially with regards to advanced technology transfers to China. Do you think that will have a negative impact on China in the mid to long term? And how are you positioning your portfolio in the face of this uncertainty?

Watson: It may really hurt China in the short term because we can’t buy new chips. But I think we can solve the problem in the long term because we have the engineering bonus and Chinese companies are very hardworking.

In my portfolio, most of my high-tech stocks are in the new energy sectors, such as EV. Because in these sectors, Chinese companies are quite competitive and they are self-sufficient.

Paul: China has finally reopened its economy after a prolonged lockdown. How are you positioning your portfolio for this reopening play?

Watson: Firstly, I am overweight the residential consumption sector, because confidence in real estate is back. When people buy a house, they need more refurbishment and new furniture, new home appliances. This sector has a lot of growth potential.

The second sector is the traditional manufacturing sector, such as machinery and chemical industries. Because in these industries, Chinese companies are already global. They invest a lot in ASEAN, and in the Belt and Road countries. The growth potential of these developing countries is very big. So I think these traditional manufacturing companies will also benefit from the growth of these countries.

Paul: China has obviously done very well since it announced its reopening sometime in October last year, and the market has already gone up a lot. Do you think it is too late for investors to jump in at this point?

Watson: I think it is not too late. It is just the start.

The first reason is that Chinese stock valuations are quite low, both to historical levels and to other countries’ stocks.

The second reason is that China's economy accounts for nearly 20 percent of the global gross domestic product (GDP). But the share of China's stocks in global portfolios is only 4 percent. So the flow of foreign money into Chinese stocks has a lot of space to increase. Since China’s reopening, confidence has come back, and so has domestic and foreign money.