Portfolio Chart: A menu of options as bond yields reset higher
With yields hovering close to decade highs across many fixed income sectors, investors are presented with a “menu of options”. Still, selectivity matters as recession risks loom.
In the first of a two-part series, our investment team shares their 2H 2022 outlook on China equities and the three long-term structural themes.
We believe further monetary and fiscal stimulus, and some easing in the regulatory environment are expected to support China’s economy and could help to manage the risk1 of slowing growth.
Active management remains crucial, and we believe that key potential secular growth opportunities continue to resonate well among investors looking to take advantage of undemanding valuations within China’s technology, consumer and renewables industries1.
Policymakers can take various actions to help meet their growth target
There are reasons to be cautiously optimistic on China’s economic and market outlook in 2H 2022. The outbreak of the Omicron variant hit the economy hard in 2Q 2022, especially in consumption and the job market. This is prompting the government to step up fiscal support to revive economic growth.
Central bank policy is likely to be more supportive of growth, in contrast with other major central banks’ tightening bias. For this recovery to be sustainable, consumer and business confidence need to stay buoyant.
China’s economic rebound and additional stimulus could support earnings recovery. Its regulatory environment shifting from ‘framework setting’ to ‘enforcement’ could also help reduce uncertainty. These could facilitate a valuation re-rating in both onshore and offshore China equities.
Three long-term structural themes1
We believe the key secular growth opportunities remain unchanged in China’s technology, consumption and carbon neutrality sectors.
Going beyond smart phones and e-commerce
Technology has gone beyond smart phones and e-commerce in China. Artificial intelligence and cloud computing are becoming a part of everyday life. Against the backdrop of geopolitical uncertainty and the outbreak of the Omicron variant, China’s technology industry is embracing an inward economic pivot and is looking to make breakthroughs in core technologies to reduce its reliance on imported software and hardware.
Semiconductor and other hardware industries
Within China’s semiconductor industry, some companies are currently producing semiconductors at lower costs, and looking to provide better customer service.
Software and industrial automation
Software companies are also riding on the digitalisation trend and the government’s support for the creation of domestic champions. Industrial automation is another area of structural growth as companies in China are increasingly looking into labour supply and cost because of a ‘greying’ workforce and rising wages.
2. Carbon neutrality
Energy transition and carbon neutrality
Energy transition and carbon-neutrality are likely to remain one of the core investment themes. We expect rising new energy vehicle penetration, stricter emission standards and controls, and faster adoption of renewable energy to continue, and this could support revenue and earnings growth of related segments.
Additionally, the electric vehicle supply chain and renewables such as solar power supply chains, installation, and storage could present opportunities too.
The expanding middle class
We continue to see brands benefiting from the longer term ‘premiumisation’ trend as the growing middle class demands better and healthier products. In some areas, industry consolidation opportunities can help compound growth.
Healthcare spending will also likely continue to increase, and we see opportunities in areas such as medical equipment and contract research organisations (CROs) and contract manufacturing organisations (CMOs).
Overall, we are of the view that China’s policy seems to be shifting from de-risk to pro-growth. We are taking a longer term view, despite short term volatility, and are considering to selectively build positions from here.