Current rally in Chinese equities ‘has room to run’: Strategist

Alejo Czerwonko is UBS CIO for Emerging Markets Americas. He joins Yahoo Finance Live as a discussion about China’s economic outlook.

Video Transcript

SEANA SMITH We will continue to try to view it from an investment perspective – what a falling population and slowing growth mean for investors. Alejo Czerwonko, Chief Investment Officer of Emerging Markets Americas for UBS Global Wealth Management, is our guest.

Alejo, it’s great seeing you here. From an investor’s perspective, what does this translate to? These headlines: How should investors look at them?

ALEJO CZERWONKO Absolutely. Thank you so much for having me. You brought up some great points about China’s current situation, beginning with the recent GDP numbers. This data is backward-looking, but I don’t think it is.

The economic impact of the reopening is extremely important, but this does not take into account. China is attempting to engineer a recovery in 2023, just as it did in 2022 when it created a contraction. This information suggests that the rally in Chinese equity prices we have seen over the past weeks is still possible. China’s reopening is not only boosting GDP but also increasing earnings – both within China and globally.

China is the world’s largest consumer of tourist and commodities. At the end of 2019, 150 million Chinese people visited China for tourism, spending nearly $250 billion each year. This is going to boost the economies that are exposed by Chinese tourism.

You have rightly pointed out the secular obstacles to Chinese growth, namely population contraction. This is not a new phenomenon. This will undoubtedly be a significant headwind to economic growth for many years. We have to find a way to balance the structural and the cyclical.

DAVE BRIGGS How significant is China’s first population contraction since early 1960s in relation to their goal of becoming the number one economy on the planet?

ALEJO CZERWONKO It is important because GDP growth can be defined as the growth in your human capital, your physical capital, or the combination of these two. How productive are you at combining human capital and physical capital? The growth outlook for human resources is limited as you correctly point out.

While you can invest in education quality and quality health care to improve this, it isn’t going to be easy. You need to rely on the availability of physical capital, investments in these areas, and productivity. China has a lot of potential to increase both productivity and physical capital.

It is possible that China will become the most important economy in the globe, so the story of convergence can still be true. It is, however, more difficult than we imagined just a few decades ago.

SEANA SMITH Alejo, look within China. What do you like? Which are the best ways to do it?

ALEJO CZERWONKO Consider that you should not only consider investing in H-shares, but also have some a share exposure in your portfolio. This refers to shares that trade in Hong Kong off-shore, as well in Shanghai and Shenzhen. However, the China reopening story doesn’t have to end at its borders. As I mentioned earlier, large spending in commodity and big tourism – this should help boost economies in Southeast Asia as well as Latin America. Looking ahead to 2023, I see international markets as very attractive.

DAVE BRIGGS I’d like to quickly get your thoughts about one of the most serious situations on the planet: the insurrection, rebellion, riot or whatever you want to label it in Brazil and their political instability. What impact does this have on investments and the economy?

ALEJO CZERWONKO It was undoubtedly a sad set of events that happened in Brazil on Sunday 8 January. There are many parallels to the events in the US of January 6th, but there were also many differences. Remember that Brazil already had an elected president.

Remember that this event was opposed by a wide range of stakeholders including media and political stakeholders. This is why I believe we are moving beyond the headlines.

The current President Lula Da Silva is focusing investors’ attention on economic policy making. Brazil’s news is mixed in regards to the proposals to manage fiscal accounts and the proposals to manage quasi-sovereign businesses. However, we found that Brazilian assets were relatively inexpensive – equities, bond, and to a certain extent, the currency.

You have to be selective. Brazil offers some great opportunities, even though it’s a country that will be subject to political risk. However, we don’t see any political risk in this region.

DAVE BRIGGS This is an excellent point. It could have started here, however. Alejo Czerwonko Chief Investment Officer Emerging Markets Americas, UBS Global Wealth Management. Sir, I appreciate it.