Year ahead 2021: seeking clarity amid macro uncertainty
As market volatility could persist in 2021, how can investors cut through the fog of uncertainty?
China is among the earliest economies to recover from the global public health crisis. And as the economy gradually recovers, investors could consider a three-step approach when assessing potential investing opportunities in Chinese equities.
Step 1: Analyse macroeconomic signals
China’s real gross domestic product (GDP) growth rate2 has turned positive on a year-over-year basis in the second quarter of 2020, signalling continuous economic recovery after containing the fallout of the global public health crisis. Most of mobility restriction measures have been lifted, and “health codes” are being used to mitigate the risk of new waves of infections.
Still, the Chinese government has taken a different approach from other developed market governments in fiscal stimulus, mainly relying on infrastructure investment instead of cash handouts to help stabilise its economy.
Investment, particularly state-led infrastructure projects, has been the major contributor to the recovery since April. Consumption and service sectors are also following suit, strengthening the recovery in the second half of 2020.
Real GDP growth2
The recovery allows the People’s Bank of China (PBOC) to carry out a balanced monetary policy, focusing on targeted support to the real economy. Since the PBOC has avoided large-scale liquidity injection and asset purchase, the renminbi (RMB) remained strong against the US dollar (USD)3.
With the USD expected to weaken in the medium term, the PBOC should have more flexibility in allowing the RMB to appreciate. While this may seem to undermine China’s export competitiveness, a stronger RMB would also imply cheaper imports of consumer goods, raw materials and manufacturing components.
Moreover, China is looking to attract more international capital into its financial markets. A modest appreciation could enhance the appeal of Chinese assets.
Step 2: Focus on policy factors
Support to the real economy, particularly small- and medium-sized enterprises and the technology sector remain the top priorities for the PBOC, alongside fine-tuning tools to adjust aggregate credit and funding cost.
The PBOC is also keeping a close eye on potential bubbles in the property and stock markets. Regulatory actions have been taken to control fund flows into these markets.
China’s cyclical upswing could add to a broad range of structural growth factors that would favour companies in the new economy. The public health crisis has accelerated technology adoption in finance, education, healthcare and other areas within the services sector.
In our current view, its economic recovery supports corporate earnings, and both domestic and foreign investors are encouraged by this outlook. This could help sustain the momentum in the Chinese stock market.
Foreign investors’ holdings of onshore Chinese equities4
Step 3: Capitalise on long-term trends
Chinese policymakers, while avoiding excessive stimulus, are also focusing on long-term potential. China is scheduled to start formulating a new Five-Year Plan, alongside a longer term development plan through 20355.
The upcoming party plenum in October is slated to unveil the 14th Five-Year Plan and this would provide clarity on the medium-term development of the Chinese economy. Active selection would be crucial to capture these structural benefits.
We believe domestic consumption and technological innovation are likely to be the key focuses, and domestic leaders in consumer services and technology sectors could become the major beneficiaries of these new policies. Currently, these sectors are among the key components of China’s stock markets.
Sector composition of major China indices6
Looking ahead, China’s economic growth is expected to revert to its long-term trend as recovery broadens in domestic demand. A consolidating economy and a cautious central bank have made Chinese assets relatively attractive for both domestic and foreign investors.