While the headline data on the economy were relatively positive, Hong Kong and China markets had a mixed month. Market sentiment was further hit by the geopolitical tensions, and the recovery from the exit of ‘COVID Zero’ was milder than expected. Over the month of March, the CSI 300 index fell 0.46% (rose 0.51% in US$ terms), while the Hang Seng Index was 3.10% higher (3.10% in US$ terms).

Three months after China’s exit from its stringent COVID policy, although the worst is behind us, the economic recovery remained sluggish in China. Sentiment seems to have recovered more, as reflected by the positive PMI figures. However, sector data showed limited recovery in the physical economy, sector data across industrial production, housing market, and exports continued to show lacklustre growth. This is also indirectly proven by the borderline deflation reflected by the CPI and PPI data, as weaker demand and excess supply pressures prices lower.

As Chinese growth is facing problems both internally and externally, equity market upside could be capped in the short term. Apart from the weaker economic recovery, geopolitical tensions also pose as a headwind to the Chinese equity market. The Sino-US conflict showed no signs of easing, and further worsened after Taiwan President’s visit to the US, concerns over the further decoupling drew funds away from the market. Although we expect the market to further grow in the longer term, downside are higher in the short term after the earlier rebound, we could prefer to take a cautious approach towards the China market and wouldn’t further increase exposure at current valuation levels.