With the changing regulatory landscape and sector dynamics in China equities, we believe that some corporates, which may benefit from an economic turnaround, could present opportunities either from an earnings recovery or a potential valuation re-rating.

3 near-term sectors we are focusing on¹

Amid sharply higher raw material prices, many consumer businesses suffered from a margin squeeze in 2021, leading to earnings downgrades.

As anticipated, towards the end of 2021, a number of industry leaders announced price hikes, ranging from condiment manufacturers to other food and beverage makers. Over time, their strength in brand power could help some quality companies navigate the material-caused inflation and regain higher levels of profitability. We are looking out for signs of margin and earnings recovery in 2022, especially in mid/downstream businesses.

Within real estate, there has been a notable U-turn in the industry landscape by giving developers improved access to onshore capital markets, loosening purchase restrictions locally, and delaying the expansion of a property tax pilot programme in 2022.

Within this segment, we prefer to focus on names that come with their own structural drivers. For example, property management companies, or consumer companies such as furniture or decorative paint which are consolidating the market, and hence decoupling from the underlying property cycles.

After more than a year of regulatory reset, the markets are expecting the policy focus to shift from ‘announcement’ in 2021 to ‘implementation’ in 2022. Again, an improvement in sentiment should be supportive of valuation re-rating. We believe the better quality internet companies could remain robust operationally and financially, with long growth runways.

Conclusion

We believe that active management remains crucial for onshore and offshore China equities, and the key potential secular growth opportunities would continue to resonate.

Leveraging our on-the-ground research which focuses on company fundamentals, our investment professionals integrate bottom-up stock selection with structural themes, seeking to capture opportunities with long-term growth potential.

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