Hong Kong and China equities had an amazing start to the year, as market sentiment remains very positive, the pivot on COVID policy and sector regulation lifted the economic outlook. Over the month of January, the CSI 300 Index was 7.37% higher (9.64% in US$ terms), whilst the Hang Seng Index surged 10.42% (9.90% in US$ terms)

The push to return to normal continued, as borders reopen and economic activities resume to normal. The reopening is followed by the improvements in economic data, quantitative data during the Lunar New Year provided further evidence to the actual recovery in economic activity. With the other major issue of property crisis is also largely under control after the government intervened in late 2022, the outlook of China for the year is positive. The economy will buck the global trend of economic slowdown, the relatively loose monetary and fiscal policy also help with the economy and valuations.

That said, although the Chinese economy is expected to fare better than external markets in the year, the huge rally in recent months has reduced the upside potential; we also acknowledge the risks arising from policy changes. That said, we still expect the China market to perform in the year thanks to its relative insulation to the external markets. In the shorter term, we see risks of a market correction, the fair value of the upside potential currently does not fully justify the downside risks. We suggest buying the dips in the Hong Kong and China markets to achieve better risk adjusted returns.