Navigating China’s “healthy bull market”

China’s economy outperformed other markets in the region in recent months, thanks to its early containment of the Covid-19 pandemic. However, this does not mean that we are totally out of the woods. For instance, the country’s path to recovery has been uneven and growth has mostly been on the supply side, such as steel production that is driven by infrastructure demand. Although China’s unemployment is not a serious issue, consumers are still wary about their jobs and hence retail sales have rebounded rather gradually.

Short-term opportunities in traditional sectors

With current market conditions, investors have become more selective with focus being placed on industries that can benefit from the pandemic in the long run, including companies from the online services, healthcare, technology and automation sectors. These stocks have posted significant gains in just a few months.  As we have already witnessed considerable rise in stock prices, we have for now lowered our exposure and taken some profits.

With the economy getting back on track and potential COVID-19 vaccines on the horizon, we believe traditional industries such as financials and retail could present some short-term opportunities for investors.

Optimistic outlook for A-shares

Looking ahead, we believe A-shares will remain attractive. It is one of our key investment themes for this year, and we have increased our A-share holdings in our portfolio from a year ago due to three reasons.

Firstly, despite the complicated relationship between China and the US, A-share investments are still dominated by mainland investors. Participation from international investors is relatively limited. Therefore, the market is less affected by geopolitical issues versus other offshore Chinese equities such as H-shares and ADRs.

Secondly, investors can be spoiled for choice.  The business nature of A-share companies is quite different from offshore listed Chinese companies, and many of them could benefit from the post-pandemic era.

Thirdly, we acknowledge that investors are concerned if a bubble is brewing in the A-shares market after stock prices rose by much. Whilst overall market risk has risen, we think it is still manageable. The Chinese government has introduced a series of measures to stabilise and steer the market to a “healthy bull market” and to avoid the type of shocks seen in 2015.

As long as recovery continues in a healthy and gradual pace, we believe the market will be able to hold up its momentum as traditional names move in to support after overpriced stocks retreat.

Weakening US dollar alleviates pressure on bond issuance

In the wake of the upcoming presidential election in the US, investors may need to manage their risks more carefully. As presidential debates between the two major-party candidates begin this month, any fierce remarks could trigger market volatilities.

Compared to single-asset portfolios, multi-asset portfolios utilise more risk management tools like gold and other less risky assets to help investors diversify investment risk.

We have been favouring Chinese offshore bonds since the market shock in March when many offshore bonds had emerged with attractive valuations. Whilst the market has become calmer, liquidity has repatriated and yield spreads have narrowed considerably. Nonetheless, choices for offshore bonds remain abundant.

On the other hand, the weakening US dollar has alleviated the financing pressure for offshore bond issuers. Sectors such as offshore real estate bonds could offer potentially attractive yields, as well as benefit from the recovering domestic economy and property market.

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