Opportunities abound, investor interest in China equity soars

The Chinese equity markets have been the best performing markets in the Asia Pacific ex Japan region YTD, rebounding from their March lows on the back of the strong recovery in the economy post the COVID-19 induced slowdown.

With regard to the pandemic, new case numbers in mainland China have remained very low. Having moved quickly to manage the crisis, China is now leading other countries in terms of its economic recovery. Industrial activity improved sequentially through the summer, while domestic consumption is almost back to pre-pandemic levels – albeit areas such as tourism have yet to see a strong rebound. Exports and investment spending have also remained resilient.

The recovery has been helped by support measures from the government, both in terms of monetary and fiscal stimulus. On the monetary front, the People’s Bank of China has lowered interest rates and cut reserve ratio requirements for banks. On the fiscal side, the government issued special purpose bonds and also raised the quota for local government bond issuances to facilitate increased fiscal spending. The impact of these measures will likely become more evident as we move through the second half of 2020. With the economy gradually finding a firmer footing, the prospect for further stimulus will likely depend on whether we see a continued improvement in the economic data.  

Signs of China’s strong economic recovery has encouraged significant inflows from foreign investors. YTD, we have seen net inflows into the China A-share market via the Northbound Stock Connect program. Investors also bought aggressively into ‘lockdown winners’, including e-commerce and online gaming, healthcare, cloud computing and technology more broadly – where earnings are benefiting from an accelerating shift in consumption patterns post crisis.

The strength in markets has come against the backdrop of heightened geopolitical tensions in the region, given fluid relationship between the US and Chinese governments. Notably, the US has further tightened restrictions on select Chinese companies.

Although earnings in many sectors will likely face challenges in the near term, markets have been willing to look through this crisis, taking the view that there is scope for a healthy recovery next year to a more ‘normalised’ level of profitability. The more solid economic backdrop in China has translated into an improving corporate earnings picture where consensus earnings revision trends have largely stabilised. Our attention is, as always, focused on establishing the medium-term prospects for the businesses in which we are invested.

Where are the opportunities?

Looking ahead, the key drivers of China’s economic dynamics and market movements will likely continue to be the pace of normalisation following the COVID-19 shock, policy responses and ongoing US-China relationship. In terms of strategy, we remain focused on those stocks exposed to the more secular growth themes in the region.

In the medium term, we continue to favour domestic Chinese consumer-facing businesses and Hong Kong consumer goods companies with strong brand value and pricing power, which will benefit from upgrades.

We also remain positive on online businesses, as the adoption of digital life during the pandemic has accelerated the online migration process in China. This bodes well for the sector’s business outlook.

We are interested in the industrials sector, specifically in electric-vehicle stocks, and machinery companies that will benefit supply chain localisation in China and the pickup in infrastructure investment we will likely see in the second half.

We also like selective technology and media, as well as 5G plays. On the other hand, we shy away from energy, oil and gas stocks as well as bank, given our view that these sectors are likely to be structurally challenged in the medium term.

As a long-term investor in the Chinese security markets, we take a bottom-up investment approach across onshore and offshore Chinese stocks. We are able to account for both local insights and global perspectives, thanks to our network of investment professionals based out of Shanghai, Hong Kong SAR, Taipei and Singapore. This set-up allows for more informed decisions to be made, and in turn, more impactful outcomes for investors who choose to work with us.


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