Ricky Tang, Deputy Head of Multi-Asset Product, North Asia
China has recently revealed its 15-year development roadmap at the fifth plenary session of the 19th Central Committee of the Communist Party of China. The 14th Five-Year Plan also mapped out the country’s economic blueprint, which emphasised on self-sufficiency and greater support for innovation and technology, and be less reliant on export and foreign investments.
Coupled with the market’s shift in focus from the pandemic to economic recovery, we believe the investment themes in China could shift from the 3D of 2020, which are Digitalisation, Deglobalisation, and Default, to the 3D of 2021, which are Diversification, Dual-circulation, and Deleveraging.
Since Covid-19 hit the world in early 2020, investment markets globally have been dominated by the theme of ‘digitalisation’ with prices of related assets, such as those in semiconductor, internet and technology sectors, soaring. From a valuation perspective, they are no longer cheap and have priced in most, if not all, of the earnings growth in the coming years.
With news of vaccines and the hope of economies normalising, investors should consider taking profit partially in “new economy” stocks and diversify into areas which are likely to benefit from the economic recovery. Sectors like materials and industrials offer attractive valuations and could provide some interesting tactical growth opportunities for investors. That said, we believe the secular trends of technological innovation and digitalisation are here to stay, and thus while short-term profit-taking pressure might warrant some risk management measures, they will remain important growth drivers for the market in the long-run.
Many investors hoped for a reversal of “de-globalisation” with Joe Biden becoming the US president, but the reality is that it is unlikely for this trend to reverse, despite the change of a US president. With that, China has proposed the concept of “dual-circulation”, in which the “internal circulation” will continue to focus on enhancing self-sufficiency, especially in the advanced technology sector, while maintaining the “external circulation” through exports and foreign partnerships to facilitate and amplify the “internal circulation”.
Under the dual circulation strategy, some existing investment themes such as self-sufficiency and consumption upgrades will be further strengthened by strong government support, while opportunities will also emerge in new areas such as energy transition, electric vehicles, and smart manufacturing (robotics and industrial automations). The recent record numbers in China export data should also boost sentiment in “external circulation” related investments.
Over the years, the real estate sector has steadily increased leverage given the favourable market and attractive business margins. Some real estate players have utilised the lower yields on offer to borrow even more earlier in 2020 after the Covid-19 induced extraordinary monetary easing measures from central banks. The high leverage and the importance of the sector have triggered some alarms, and by the same token of redirecting financial resources to areas such advanced technology as laid out in the 15-year development roadmap, the Chinese real estate sector is likely to face more headwinds with gradual deleveraging directives from the authorities.
Going forward, the market is likely to see more isolated cases of defaults, and for the real estate sector, more pricing differentiation is expected with the government-directed deleveraging efforts. This could prove to be more difficult for the overall market, but could also provide opportunities for investors to be properly rewarded for thorough credit research.
All in all, we continue to find interesting growth and income opportunities in China, but these opportunities could appear in different areas of the market. The new 3D themes of diversification, dual-circulation and deleveraging could provide investors with some insights on how to identify and capture these investment ideas in China in 2021.
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