Topic 4: China’s Reopening
Bull case: China’s reopening will help unsnarl global supply chains, driving global growth and helping ease inflation pressures. Stimulus measures will be supportive.
Bear case: China’s re-opening will be uneven and inflationary pressures will continue.
Background: After nearly three years of a stringent policy that closed down large and important parts of China, in what was called Zero-COVID-19 policy, Beijing has ordered the reopening. Although the COVID-19 virus continues to spread across the country, leading to a self-imposed voluntary lockdown, expectations are that by the second half of the year, the economy could begin to emerge from the serious economic decline wrought by strict lockdown measures. Supporting the economy, which is the world’s second largest, has become an important message from top Chinese leadership.
In addition, the government is enacting policies to help the beleaguered and debt-laden property development market. The totality of the property market accounts for nearly 25% of China’s economy. Comments regarding support for the private sector are of particular interest as that could help generate stronger growth for the overall economy, even if only marginally.
Moreover, government officials have stressed they want to ensure personal consumption, or personal spending, gains momentum following years of pent-up demand as fears of lockdowns dominated consumer activity.
Trade with China’s Asian partners is expected to improve, as is trade with traditional partners in Europe, particularly Germany, France, and Italy. With central banks continuing to raise rates in order to tackle inflation, and growing concerns about a slowing global economy, China’s emergence as a dominant presence in world trade would certainly help bolster prospects for a stronger global economic landscape.
Our take: China’s reopening is more bullish than bearish, but geopolitical tensions will remain a risk. We believe China-heavy emerging market equities are more of a trade than a long-term investment at this point.
LPL Research remains reluctant bulls but wary of the risks of further equity market volatility. Mild recession and modest earnings declines are likely already baked in the cake. Should the Fed pause after a March interest rate hike, the stage may be set for a nice stock market rebound on the back of falling inflation, reasonable valuations, and stable interest rates. Earnings may not be much of a catalyst this earnings season, but we see some of the pessimism turning into optimism as 2023 progresses.
The hotly contested bull-bear debate will continue early in 2023 and likely keep volatility elevated in the near term, but we expect these key risks to stocks to be largely resolved mid-year, setting the stage for stocks to make a run at our year-end fair value S&P 500 target of 4,400–4,500 by year-end.