Chinese bonds and equities strategy in the second half of 2020

Although the COVID-19 pandemic has yet to come under control globally, investors seem to have resumed their confidence. The continuous liquidity injections by global central banks and the European Union’s 750 billion euro stimulus package have also boosted market sentiment.

China leads a remarkable economic recovery in the second quarter of 2020 over other countries, despite its major economic indicators still being far from normal levels of growth. With ample liquidity and other favourable factors, we remain positive on risk assets in the short term and expect to increase our exposure to equities and corporate bonds. The US presidential debates starting September could result in further tensions between China and the US, triggering higher market volatilities.

Risks also arise from the stretched valuation. The new economy sectors have been the key driver of market return since March. These stocks’ rallies have reflected much of the recent optimism brought by the pandemic-induced economic structural changes. While these companies could remain strongly supported near term, their current valuations pose considerable risks to the entire market.

Over the short term, we are still positive on equities and corporate bonds. We believe a swift and proactive risk management approach is crucial when investing in Chinese equities and bonds in the second half of 2020.

What sectors are worthy of our attention, given the recent rally in China’s new economy stocks?

Our strategies have become more selective by shifting the focus from stocks that have exceeded their price targets to undervalued stocks that can still benefit from post-pandemic economic trends. In addition, as mainland China’s economy gradually recovers, we are becoming a little more constructive on companies in the traditional industries such as energy, resources in particular gold related companies, as well as financial companies with relatively attractive valuations and stronger fundamentals. Under the premise that the traditional industries are getting back on track, these stocks may see upside potential driven by revaluation.

To sum up, being more cautious in stock selection within the new economy sectors and some rotation into the traditional industries, will be the key strategies of our equity investment.

How do you see the bond market? Real estate has been the fastest-recovering industry since the outbreak of COVID-19 pandemic. What investment value do you see in mainland Chinese real estate bonds?

Thanks to the US Fed’s steep rate cuts and unlimited quantitative easing programme, US dollar denominated corporate bonds have experienced a substantial rise in demand since March. Meanwhile, we have also seen stronger funding needs from mainland Chinese real estate companies as a result of economic recovery and rebound in sales. There was an increase in the new bond issued by mainland Chinese real estate companies in recent months, with most of them are high yields with relative short maturities.

Sales in mainland Chinese real estate continue to show signs of recovery. According to recent data, most of the companies have achieved double-digit sales growth, both on a year-on-year and month-on-month basis.

Moreover, mainland Chinese real estate bonds also benefit from factors such as the domestic easing monetary policy, loosening real estate market regulations in various cities, and an improving financing environment. From the supply side point of view, as most of the new bond issuance are for re-financing purpose, the net growth in bond supply is limited and thus providing support for the mainland Chinese real estate bond price.


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