Consumer, electric vehicle sectors tipped to outperform as China sets 5% GDP growth target

The consumption, renewables and electric vehicle sectors are expected to drive China's 5% GDP growth this year, with the tech and real estate industries unlikely to see the exponential growth they enjoyed in previous periods.

The annual gathering of China's National People's Congress — the country's top legislature — ended on Monday after nine days, during which China's top leaders were confirmed and new policies were laid out including the setting of its GDP target growth for this year.

While the target growth of "around 5%" — according to newly appointed Premier Li Qiang — fell slightly below market expectations, it was "not really that far off," said Andrew Lee, Hong Kong-based investment director at Capital Group, which has $2.2 trillion in assets under management.

The markets were expecting China to set the GDP growth target at more than 5%, he said, and the relatively conservative target reflected China's focus on building stability in the economy.

"Stability seems to be a real focus and of utmost importance … We think that the Chinese economy will be experiencing better growth this year compared to the last largely driven by COVID reopening and the policy measures that would aim to stabilize growth," Mr. Lee said.

China had 3% GDP growth in 2022, down from 8.1% for 2021.

"But at the same time, we're cognizant of the potential risk of it going lower than the 5% (target), given the fact that there could be a potential contraction in exports, as well as the still weak property sector, which contributes around 25% of the country's GDP," he added.

The target still indicates a pro-growth stance, said Jing Liu, chief economist for Greater China at HSBC Holdings. "The conservative growth target to some extent reflects a cautious approach in light of ongoing uncertainties, as well as the government's desire to transition from a credit-driven growth model to a more sustainable, inclusive and high-quality growth model," she said.

HSBC expects GDP growth to reach 5.6% this year, "propelled by domestic consumption and ongoing policy support for medium- and longer-term growth drivers," she added.

Generally, policies focused on high-speed growth in China have benefited value stocks such as infrastructure, property and building materials, while policies focused on high-quality growth have benefited growth sections such as information technology, electric vehicles and solar, according to analysis by the equity strategy team at HSBC Qianhai Securities — the securities joint venture between HSBC and Qianhai Financial Holdings.

"This year's lower-than-expected growth target should benefit long-term growth names, such as info tech, health care and high-end manufacturing," the team wrote in an email interview. "In 2023, we also expect (state-owned enterprises) and the government to expand their software spending, and believe (semiconductor) testing equipment will see a cyclical bottom before the semiconductor sector" in the second half of the year.

The team added that they have already observed several indicators of the semiconductor sector bottoming, for instance falling demand for panel and passive components, and cuts to capital expenditure at semiconductor firms such as ASE Technology Holding and Amkor Technology.

Sources were nearly unanimous about the potential for the consumer, renewables and EV sectors to perform well this year.

Ms. Liu said that "a robust rebound in consumption will drive the economic recovery this year, given that it was one of the sectors most severely impacted by the pandemic, and (since) activity (is) now normalizing. Excess savings accumulated during the pandemic are expected to support pent-up demand, particularly for services such as travel and tourism, dining out and other entertainment activities."

"As service consumption recovers, more jobs might be created for lower income households, which in turn supports discretionary goods consumption growth," she said.

Chaoping Zhu, Shanghai-based global market strategist at J.P. Morgan Asset Management, also observed that consumption is already rebounding strongly and that "high-frequency proxies such as domestic travel, movie box office and other traffic data show consumption is back on track."

Consumer confidence rose to 91.2 points in January, up from 88.3 the month before, according to the National Bureau of Statistics of China. It is the highest reading since April 2022.

He also noted that "China's industrial policy in nurturing new industries, such as semiconductors and other technological hardware to reduce dependence on imports, renewable energy and electric vehicles could also be the growth area in the long term."

However, Wong Kok Hoi, founder and CIO of Singapore-based APS Asset Management, which has $2.5 billion in AUM, said that even though the EV sector could perform well, he is not positive on its investment potential because of fierce competition.

On China real estate and technology, opinions were more mixed.

For instance, Mr. Zhu of J.P. Morgan Asset Management, which has $2.5 trillion in AUM, said that the property sector might no longer be a growth driver for the Chinese economy. "Land auctions have picked up slightly but are still in weak territory in comparison with previous years, so local governments are under pressure from the shrinking land revenue," he said. There could be further measures to support the sector, he added, but the effectiveness of those measures remains a concern.

Still, Ms. Liu believes that supportive measures such as the easing of home ownership requirements and lower mortgage rates will help to revive demand for real estate. And Capital Group's Mr. Lee said that given the size of the industry, "it's a very important component of the economy. And so we think that the policies will tend to be a little bit more on the positive side on the property sectors going forward. That's what we've been seeing so far," he said.

He added that within the tech sector, investors will have to be more selective with the companies that have the potential to outperform, even if the regulatory environment has improved.

"We've started to see some of the large gaming companies having received long-awaited approvals for new video games licenses. And some of the reforms in some of the large platforms are starting to see outcomes, I would say, from the long duration of debates and discussions. So I think the signals are telling us the rectifications or relatively harsh regulatory processes are nearing an end," he said.

But "not all tech companies are created equal," he said. The asset manager is more focused on the companies that have an optimized cost structure and more focused business strategy.

These include firms that have made "some drastic changes in expenses and growth strategies. So instead of seeking out large-scale acquisitions for horizontal expansion, they have actually divested from equity stakes in other tech firms and used the excess cash to buy back shares or pay special dividends to shareholders. So, we believe that tech companies do have a role to play, innovation will continue to drive growth. But we have to be selective in that space," Mr. Lee said.