How can investors capture opportunities from the China growth story?

Our view on the Chinese equity market

We remain relatively cautious on the outlook for equity market. On the one hand, we are concerned about the potential drag on the Chinese economy from decreasing demand and export caused by COVID-19 in the US and Europe. On the other hand, market sentiment may be affected by renewed tension between China and the US due to the global economic impact of the coronavirus. So we do not believe it is the right time to significantly increase holdings in equities yet. Furthermore, we believe the market may be range-bound in the near term, as the current earnings estimates have not fully priced in implications of the coronavirus.

Among A-share, H-share or ADR, we continue to prefer the A-share market. We find more attractive opportunities in the A-share market, and believe this market should be more resilient, in case of another flare up of the tension between China and the US.

Our view on the Chinese bond market

In terms of bonds, we prefer corporate bonds, as is the case in our other investment strategies. Current valuation and the supply/demand dynamic are more attractive in offshore USD bonds than in onshore bonds.

Going forward, we believe RMB bonds are likely to offer more attractive yields, when yields of USD bonds decline further.

How can investors capture opportunities from the China growth story?

In terms of equities, we switched to sectors likely to benefit from the reopening of the economy and the stimulation of consumption, including some automobile manufacturers and sales-related companies. Recent data has shown a gradual recovery of automobile sales in mainland China. We believe automobile-related stocks could potentially outperform. We also look to increase holdings in cement and industrial machinery companies, as the central government will reaccelerate infrastructure investment to support overall economic growth. In terms of the technology sector, manufacturers of 5G upgrade and other manufacturing automation related equipment are likely to benefit in the medium term due to the disruption of covid-19, as an increasing number of companies have now realised the importance of furthering and accelerating automation to reduce the reliance on human in the production process, which should provide significant support for technology leaders in this area in the long term.

In terms of bonds, we have switched to USD investment grade bonds, including technology companies, as well as some State Owned Enterprises (SOE) and utility companies. In terms of higher yielding bonds, some selective property developers have offered some attractive opportunities, which have seen sales have bounced strongly, and the property market is likely to recover benefitting from loosened policy stance. However, we have also noticed some property developers are under financial stress. Therefore, we would remain cautious and continue to focus on large-cap companies with higher quality and strong cash flow, in order to avoid these value traps.

Overall, our equity and bond strategies are moving towards potential beneficiaries of the upcoming cyclical recovery in the economy, as well as sectors which are boosted by the acceleration of the long-term trends due to the coronavirus, such as production automation.


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