As the pandemic continues to evolve, China is seeing early signs of economic recovery as number of new infections decline and production resumes. Against this backdrop, what are the opportunities ahead in the view of our Emerging Markets and Asia Pacific (EMAP) Equities Team?
 

Q1. WHAT IS THE IMPACT OF THE PANDEMIC ON THE CHINESE EQUITY MARKETS?
 

• Markets have been volatile and are likely to remain so in the near term as the human and economic toll of the pandemic continues to dominate news headlines.
  
• Nonetheless, China's long-term structural trends such as consumption upgrades, domestic technology and healthcare innovation remain intact. Regarding JPMorgan China A-Share Opportunities Fund, the changes made to our portfolio amid the pandemic have been at the margin as the secular growth trends we invest in positioned us well in coping with market uncertainty. In fact, the current outbreak will likely speed up certain structural trends that are already happening. For example, Chinese households are becoming increasingly focused on the quantity and quality of healthcare services, particularly on clinical trials, diagnostics and vaccinations. The manufacturing industry and business environment are also expected to accelerate automation and software application.
   

China loosens monetary policy to support businesses

Source: CEIC, People’s Bank of China, J.P. Morgan Asset Management, China Central Depository & Clearing Co., Shanghai Clearing House. Credit growth to GDP growth ratio utilise rolling 12-month nominal GDP and credit stock. CPI stands for consumer price index and PPI stands for producer price index. *Stock of credit to the real economy, defined as the net total social financing plus government financing. **Wenzhou SME crisis refers to the wave of bankruptcies and funding problems faced by a large number of SMEs in Wenzhou in 2011. ***LGFV refers to local government financing vehicle. Data reflect most recently available as of 31.03.2020.

Q3. WHERE DO YOUR CONVICTIONS LIE FOR THE YEAR AHEAD¹?
 

• As a growth-oriented investor looking for quality investments to deliver excess returns, we have identified opportunities in long-term growth trends we believe are structurally attractive in sectors such as healthcare, technology and consumption. Meanwhile, the pandemic indeed has pulled forward demand and accelerated some structural trends and themes which we already invested in (such as software and cloud-related businesses as well as research and development (R&D) and equipment-related businesses in healthcare). With further industry consolidation expected in various sectors, we believe the strong will likely emerge stronger.
  
  

• Healthcare is a broad term in China’s context. There are plenty of subsectors which could benefit from several super trends in China. 
  • Contract research and manufacturing organisations are benefitting from growing global outsourcing trends in research & development (R&D).
  • Innovative pharmaceuticals and diagnostics-related companies are reaping rewards from the long-term R&D investments and taking market share to the global level.
  • Hospitals and medical equipment companies are benefitting from the increasing healthcare spending by Chinese households.
• Technology is more than just smartphones and eCommerce, especially in the onshore market. We are optimistic on the growth of software companies in China underpinned by the increasing demand for data centers and cloud application to enhance business efficiency. And with the rollout of 5G technology, software and semiconductors would be on center stage.
  
• As Chinese middle class continues to accumulate wealth, their demand for goods and services with better quality fortifies the consumption upgrade theme.
  • Industry leaders within staples like condiments are expected to benefit from further industry consolidation with better resources and distribution networks.
  • Growing penetration rate in eCommerce among the lower-tier cities could also help extend the duration of growth.
  • Better financial services, e.g. in consumer banking and wealth management, are likely to play a part in all of this.

Q4. IN YOUR VIEW, WHY STAYING INVESTED IN CHINA A-SHARES¹?
 

• As China’s economy rebalances and slows from previous breakneck rates, the continued opening up of the A-share market offers offshore investors the chance to invest in higher-quality companies in areas that could be structurally attractive over the long term.
• China has the world’s second largest stock market². The A-share market is broad and liquid, while offering diversification benefits when compared with other stock markets. It offers foreign investors opportunities not commonly found in the offshore Chinese equity market as it is home to companies which are usually more innovative than state-owned enterprises which are typically listed offshore.
• With the increasing recognition of A-shares globally, we expect opportunities in the A-share market to further widen from the previously narrow list of “foreign-favourite” stocks.
  
• Still, investing in A-shares isn’t risk-free and there is a strong case for active management. The Chinese authorities have done a robust job in navigating macro challenges, but headwinds persist. Governance is improving but it remains uneven. Investment teams with the right resources, and with an appropriately robust long-term analytical discipline, have a good opportunity to take advantage of the pricing inefficiencies in what remains a retail-driven market.
   

MSCI A-share inclusion factor rises

Source: Bloomberg, MSCI, World Bank, J.P. Morgan Asset Management. Data reflect most recently available as of 31.12.2019.
GDP: gross domestic product; Market Cap: market capitalisation; EM: emerging markets. *Share of EM GDP is for 2018 and is calculated as Chinese nominal GDP in USD as a percentage of all emerging markets within the MSCI EM index. **Share of EM market cap is for 2018 and is calculated as China’s market capitalisation of listed domestic companies as a percentage of all emerging markets’ capitalisation of listed domestic companies within the MSCI EM index. ***Currently, an index inclusion factor (IIF) of 20% is applied to China A Large Cap, ChiNext Large Cap and China A Mid Cap (including eligible ChiNext shares). 100% A share inclusion is shown for illustrative purposes only. 
Past performance is not a reliable indicator of current and future results. 

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Conclusion

As the world continues its race to contain the outbreak, market volatility is likely to persist. Nonethesless, China’s long-term structural trends are expected to remain intact, as the economy continues to transform.

Growth-oriented investors seeking quality investments for the long term, based on their investment appetite and objectives, could consider China A-share as an integral part of their portfolios. There are plenty of attractive quality growth opportunities in sectors like healthcare, technology and consumption¹. The focus on fundamental research will be key in identifying long-term winner.

1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2. Source: The World Federation of Exchanges, data as of 31.12.2019.

This content represents our investment team’s current view and overall strategy provided for information only based on current market conditions not taking into consideration any specific investor’s investment objective and risk appetite. Not to be construed as investment recommendation or advice.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.