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A guest commentary by China Post Global, investment manager of Market Access ETFs, on the outlook for China’s equity market in 2021.
In 2021, a global economic recovery is expected to unfold, while an exit from accommodative policies will impose pressure on the valuation of equity markets. The financial sector of China, however, is recommended as asset quality will improve and return on assets will rise. Utility stocks may offer protection against the expected rise of market volatility as well.
With the help of vaccines, the world is expected to see an economic recovery amidst the pandemic, led by China and the US. The newly inaugurated US administration is acting decisively and effectively to inoculate its population, which could pave the way to a more solid recovery on the back of a strong service sector. As political analysis shows, US trade policy is now more sensible and less destructive to existing international practice, alleviating the uncertainty introduced by the last administration. Along with the waning pandemic, global trade is likely to be stimulated from a reduced level, further boosting growth momentum.
For China, the strict cross-border containment measures should ensure immunity from the pandemic for now and fortify its place as the most reliable manufacturer in the world. The de facto technology embargo and hostile US trade policy against China may loosen and restore business confidence consequently. Additionally, China’s determined implementation of supply side reform has reduced excess capacity and shadow banking risk significantly over the last 5 years. Broadly speaking, China’s economy is probably in its best shape since before the global financial crisis in 2008.
China equity market likely to outperform global peers
The valuation of international equity markets may face pressure from the withdrawal of supportive policies given the global recovery. But China’s equity market is likely to outperform global peers. US treasury yields have risen about 100 bps since mid-2020, and stock markets have recently retreated, with expensively priced internet and biotech names most affected. The predicted outperformance of China’s equity market comes from China’s restrained monetary easing during the pandemic and proactive normalization, which have led to more reasonable equity valuations.
The adjustment of the PBoC’s monetary policy stance, which started ahead of the rest of the world in May 2020, results from the principal concern of China’s top financial regulators about the formation of an asset bubble. This concern comes from witnessing the Chinese equity bubble bursting in 2015. And the drastic rise of house prices that followed, encouraged by monetary easing, which aimed to appease the crisis-induced liquidity shock. Recent remarks by the chief of China’s banking regulation body are an exact account of such concern, as well as the financial policy implemented in China, which leads us to conclude that the equity market valuation is more reasonable.
In recent years, both domestic and foreign investors have been heavily overweight a handful of prominent corporations in several sectors, most notably the consumer sector, and a cautious attitude is recommended before valuations return to a more reasonable level. This investment consensus was formed when the bubble of growth stocks came to an end in 2015 and the market craved certainty. Structural change of the Chinese economy has helped the trend as households’ share of GDP, as well as personal consumption spending, have continued to rise since 2013, with consumers becoming increasingly selective.
Consumer sector will deliver good returns in the long term
Naturally, this trend translates into stable growth in revenue of the leading companies with prestigious brands in the consumer sector, and in turn attracts more investment into these names. Only recently have they been tested, after 2020 saw global monetary easing lead to a doubling of their share price and lifted their valuations above previous peaks reached during the 2015 bubble. Their fundamental-exceeding valuations and a looming tightening of financial conditions suggests a wait-and-see strategy in the short term. Nevertheless, Chinese consumers’ purchasing power and desire will continue to grow. Meaning the consumer sector, particularly consumer services subsector, will deliver good returns in the long term.
One of the most recommended trades for 2021 is to buy the long neglected financial sector. Insurers were hit by the pandemic and then impaired by the low bond yields and credit events, though both will fade away. Depth of the insurance market in China remains extremely low compared with countries of a similar cultural background such as Japan, Korea and Singapore, especially regarding pension and health insurance. Policy makers embrace the idea of developing the insurance market as a supplement to the social security system. The recently introduced online insurance market regulation benefits the listed insurers by clarifying boundaries and setting a threshold for competition. The attractive valuations and promising outlook make insurers our top pick at present. Commercial banks, on the other hand, are also recommended on the tailwind of improving asset quality and rebounding asset return, as well as the attractive valuations even after their recent rally.
Utilities may provide extra protection against the likely increase of market volatility across the world. The unprecedented monetary easing will eventually come to an end, and the market may repeatedly undergo turmoil similar to recent events. A new fiscal package by the US may have an unexpected consequence, enticing more millennial retail investors into financial markets and increasing volatility just as in the case of GameStop recently.
Moreover, home appliance makers may also deliver decent returns, though the number of listed companies is limited. The booming US housing market and a de-escalation of trade disputes will help the makers score excellent sales and revenue.
To sum up, increased growth momentum and withdrawal of policy support may reduce market consensus. And valuations are quite high in most sectors of China’s equity market, with the financial sector being the most meaningful exception. Adding utilities to the portfolio will increase resilience against market volatility.
