Five investment experts give their thoughts on China's prospects in the Lunar New Year to Investment Week.
Jian Shi Cortesi, investment manager – China and Asia growth equities at GAM Investments
Key themes in Chinese equities
China was a top performer in 2020 in terms of pandemic control and the speed of its economic recovery. As the second largest economy in the world, the strength of the China economy has an important impact on global growth. While we have taken profit in some internet names after their stellar performance, we maintain a large exposure to companies that will benefit from permanent behavioural changes due to Covid-19, including e-commerce, online entertainment, the cloud and software. We are also positioned for a cyclical recovery through automobile and travel names. We are staying ahead of the curve by looking beyond Covid - we plan to further increase exposure to names uncorrelated to Covid, such as clean energy (solar, wind, electric vehicles) and fintech.
Clean energy is an area that we are particularly excited about. China's plan to achieve carbon neutrality means high growth potential for clean energy and electric vehicles.
China is a leader in the supply chain of solar, wind and electric vehicles. This is an emerging area that we expect to generate attractive returns for investors in the coming years.
Elizabeth Allen, head of Asian fixed income at HSBC Asset Management
The outlook for Chinese credit
2020 was a year of unprecedented challenges for the global economy, markets and society. But it was also another year of important development in Asian bond markets, with greater investment from outside Asia than we have ever seen before. China's economic recovery helped slow the pace of credit rating downgrades in the second half of the year, compared to the sharp sell-off seen in March and April.
And importantly, the credit market did not buckle under the strain of some of the most severe economic headwinds in history, with the high-yield default rate in 2020 for China offshore bonds standing at 4.6% (1.3% for onshore), versus 6.8% for US high yield. Yet Chinese credit continues to trade at a premium to developed market peers, pointing to its relative attractiveness for yield-hungry global investors. Of course, risks do remain acute throughout global markets including those around geopolitics and trade. There are concerns about defaults in the onshore China bond market affecting the offshore USD credit market.
While there is some spillover, it is limited – we see it as a continuation of the ongoing credit clean up trend - and has also led to greater pricing differentiation between issuers with sound underlying credit fundamentals and those simply relying on state support.
Mike Kerley, portfolio manager at Janus Henderson Investors
Outlook for Asia dividends
The outlook for income in Asia remains very strong. We are more weighted to North Asia, which is heavily exposed to semi-conductor electronic trends and is further on in its recovery.
However, we will likely seek greater exposure to the South as the recoveries in those countries catch up. We have made changes on our China portfolio towards some areas of consumer discretionary which we think still have value, for example insurance, auto-dealerships and software.
We still favour the materials sector where we expect pricing to remain strong throughout 2021 as a lack of new suppliers will keep prices high and therefore free cash flow and dividends will be high as well.
A change in the US presidency may change the way that things are done but not necessarily the outcome. Concerns remain in the US over China's objectives and the projected growth of the Chinese economy, which will put pressure on international relations.
We will likely see a change of approach in the US from unilateral actions and sanctions to a more pragmatic, multilateral approach based on negotiation.
Gordon Fraser, portfolio manager of the BlackRock Emerging Markets fund
China is carving a path for the global economic recovery China has effectively controlled the virus and managed a challenging period for its economy. Its share of world exports rose to about 14% in 2020, a new high, thanks to global spending in technology and Covid-related protective equipment.
But domestic consumption has also risen steadily and played a large role in last year's V-shaped recovery, adding more than 50% of China's GDP and up from 2019 levels, with everything from fixed asset investment to industrial outputs via consumer confidence proving remarkably resilient through a turbulent year. In our view, despite being towards the top of their historical range, we don't see Chinese valuations as being stretched – and this is for two reasons.
Firstly, there is a genuine earnings growth story underpinned by strong activity, which we continue to see across many sectors.
Secondly, Chinese valuations started from very low levels reflecting negative sentiment around US tensions. We believe China's impressive economic recovery trajectory is set to continue. However, given the central bank's tightening monetary policy and the strong performance in the onshore and offshore equity markets seen in 2020, this is a time to be more selective with exposures across Chinese equities.
Vivian Lin Thurston, partner and portfolio manager at William Blair Investment Management
China's unwavering growth journey forward
We maintain a favourable view of the Chinese economy and equity market in 2021. Both are supported by the resumption and acceleration of domestic consumption growth and increased manufacturing activity on the back of stimulus measures and a global economy recovery. This outlook is consistent with what we view as an attractive long-term investment case for China. That view is predicated on the country's structural shift to domestic consumption, continued technological advancements, ongoing structural reforms, and effective policy support.
Consumer-centric growth, enabled by innovation and disruptive technologies, and import substitution on the supply side remain key investment themes. Specifically, the China A-share market, the largest equity market for publicly listed China-domiciled companies, presents an attractive investment opportunity for global investors. It provides broad and deep exposure to Chinese economic growth in 2021 and onward.
In addition, improved foreign access to the China A-share market, combined with a structural shift to the asset class among the Chinese households, should also support the investment case for China A-shares from a technical perspective. Within the China A-share market, we are especially attracted to companies that generate fast growth and strong returns in a few structurally growing industries, including consumer, healthcare, technology, high-end manufacturing, and green energy.
Jonathan Pines, lead portfolio manager – Asia ex-Japan at the international business of Federated Hermes
Booming mutual funds market in China and the impact on greater China equities
The mutual fund market has been growing rapidly in China and reached RMB 20.8trnn by the end of 2020. CICC estimates that there are 1,095 funds, with combined asset under management of RMB 344.7bn, that are eligible for investments in Hong Kong listed equities. The top 10 most popular names (HK-listed only) by holdings are Tencent, Meituan, Xiaomi, Sunny Optical, Greatwall Motor, Hong Kong Exchange, Smoore International, Wuxi Biologic , Kingdee international and China resources Beer. Common features of those names are that they are high growth and thematic.
Most of them already benefited from substantial net flows in 2H 2020 and received more YTD 2021. Those stocks delivered spectacular performance and many of them are now trading at record high multiples and price levels. Valuations or companies' fundamentals are not the only or even primary driver for stock performance when flow is strong.
Using the Chinese A shares market as reference, many of those popular names (often in the funds managed by the same portfolio managers who have now launched offshore products) delivered strong performance over a prolonged period.
Today (12 February) marks Chinese New Year and the spirit animal this year is the ox – considered in Chinese culture as hard-working, intelligent and reliable.
Today (12 February) marks Chinese New Year and the spirit animal this year is the ox - considered in Chinese culture as hard working, intelligent and reliable. Will the markets in China prove just as...