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China equity – A viable investment for long-term investors

China equity – A viable investment for long-term investors

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The COVID-19 epidemic in China is now mostly contained, allowing it to lift restrictions gradually and retraining our focus on the prospect of a post-coronavirus revival and the investment opportunities in the world’s second-largest economy.

Looking at longer-term trends, we believe investors should welcome the gradual inclusion of Chinese companies in global equity indices as they look for diversification and sustainable returns. Valuations that are currently more attractive than those of global equities enhance the opportunity. Furthermore, stock multiples could benefit from the Chinese market becoming more institutional in its makeup.

Below we list a number of reasons for our confidence in Chinese equities.[1]

 1. China is back at work

Over the past two months, China’s industry returned to nearly full capacity, even in Hubei region. In the services and consumer sectors, the recovery is progressing more slowly, constrained by partial travel restrictions and the loss of jobs and income. Overall, though, the gradual return to normality underscores how the government’s swift actions enabled the nation to get back on its feet relatively quickly.

Exhibit 1:

Exhibit 2:

2. Selective stimulus

In Q1 2020, China’s GDP contracted by 6.8% year-on-year. Full-year 2020 growth is likely to come in at around 3%, but with risks to the downside, depending on the pandemic’s development globally.

Since the Covid-19 outbreak, the People’s Bank of China (PBoC) has rolled out a series of measures to provide epidemic relief and stabilise demand. During the recent annual National People’s Congress, the key focus was the size of fiscal stimulus. Beijing’s spending plans imply a fiscal deficit of 8%-10% of 2020 GDP. This is less than the 12% of GDP deployed after the Global Financial Crisis.

More aggressive stimulus will be needed to support the resumption of normal operations, including more local government investment in infrastructure, education and public health. Tax and fee cuts are likely to support small and medium enterprises along with a lifting of restrictions on car purchases.

3. Easier access to China A-shares

The Stock Connect programme linking the Shanghai and Shenzhen markets to Hong Kong, launched in 2014, has made investing in onshore shares easier for international investors. They can deploy capital quickly, and the more than 1 500 stocks listed in Shanghai and Shenzhen offer investors abundant opportunities to earn alpha.

Growing participation by global investors is rendering the A-shares market more mature and is favouring long-term growth. This market provides more diversified access to structural growth opportunities, making it a complement to exposure in the China offshore markets.

As A-shares tend to be less sensitive to global market sentiment, the correlation of this market with the rest of the world is low. Adding A-shares to a portfolio can thus enhance the risk/return profile of emerging market equity exposure and even of a China offshore equity portfolio. We believe an all-China equity solution helps investors gain access to the full opportunity set, maximising the return potential.[2]

4. Key risks are monitored closely

Tensions between China and the US remain a focus for investors and we are following the situation closely.  One area of attention is the US Holding Foreign Companies Accountable Act. This requires foreign issuers of securities to establish that a foreign government does not own or control them. US-listed foreign companies will be delisted if the accounting oversight board cannot inspect the issuer’s accounting firm for three consecutive years.

We view the near-term risks as manageable. A forced delisting could happen by 2023 at the earliest. In the worst-case scenario, if Chinese American depositary receipts (ADRs) are forced to delist by then, the companies can opt to list in Hong Kong. One e-commerce giant has already done so and other leading companies including a leading online retailer and a prominent internet technology company are seeking to have a secondary listing there this month.[3]

We believe such a law should have a limited impact on the ability of Chinese companies to tap capital markets. Most Chinese firms have issued shares in Hong Kong and Shanghai rather than in the US in the past five years.

Besides, Chinese and US regulators have been negotiating on this oversight-related issue for years. There is still a possibility that compromises by China will allow it to be settled. In such a scenario, US exchanges will try to guide issuers to meet the requirements and maintain their listing in the interest of the exchanges and investors.

5. Three investment themes for long-term structural growth

Although digitalisation was already shaping China’s economy, the COVID-19 outbreak has accelerated the trend. We have sharpened our focus on tech localisation themes, cloud businesses, software and hardware.

We continue to see three structural trends that spur sustainable growth:

  • Technology innovation: China has shifted towards medium to high-end manufacturing. The size of the domestic market, higher R&D spending and a vast talent pool support this shift.
  • Consumption upgrading: We see significant growth opportunities, especially in services. Rising household income, low household debt and more diversified consumer profiles support this trend.
  • Industry consolidation: We believe this trend has longer to run in an environment of slower growth. The emergence of leading companies should provide attractive investment opportunities. Faster industry consolidation should play favourably for industry leaders over the long term.

Portfolio strategy over the long term

In summary, while investors should not overlook the risks, we believe China is too big to ignore. It is essential for investors to monitor events closely given the market’s history of volatility. Changes in valuations and earnings may necessitate tactical portfolio adjustments. Navigating China’s waters requires local expertise and a well-resourced investment team to capture the long-term growth opportunities.

Our latest webcast China’s growth challenged covers the economic and market implications for China’s growth of the COVID-19 crisis amid a trade war. We also discuss the policy and structural reform outlook after the recent National People’s Congress. We highlight our long-term portfolio strategy and its focus on structural growth stories.


[1] Click here to watch our China’s growth challenged webcast with Caroline Yu Maurer and Chi Lo

[2] For information on our strategies or investment policies, please contact your dedicated client relationship manager.

[3] Source: China’s JD.com, NetEase Win Hong Kong Approval for Listings.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Jessica Tea. The post China equity – A viable investment for long-term investors appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Coronavirus dashboard for October 5: an autumn lull as COVID-19 evolves towards seasonal endemicity

  – by New Deal democratBack in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based…

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 - by New Deal democrat

Back in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based on the rate of mutations and the period of time that previous infection makes a recovered person resistant to re-infection. Here’s his graph:




He indicated that it “illustrate[s] a scenario where we end up in a regime of year-round variant-driven circulation with more circulation in the winter than summer, but not flu-like winter seasons and summer troughs.”

In other words, we could expect higher caseloads during regular seasonal waves, but unlike influenza, the virus would never entirely recede into the background during the “off” seasons.

That is what we are seeing so far this autumn.

Confirmed cases have continued to decline, presently just under 45,000/day, a little under 1/3rd of their recent summer peak in mid-June. Deaths have been hovering between 400 and 450/day, about in the middle of their 350-550 range since the beginning of this past spring:



The longer-term graph of each since the beginning of the pandemic shows that, at their present level cases are at their lowest point since summer 2020, with the exception of a brief period during September 2020, the May-July lull in 2021, and the springtime lull this year. Deaths since spring remain lower than at any point except the May-July lull of 2021:



Because so many cases are asymptomatic, or people confirm their cases via home testing but do not get confirmation by “official” tests, we know that the confirmed cases indicated above are lower than the “real” number. For that, here is the long-term look from Biobot, which measures COVID concentrations in wastewater:



The likelihood is that there are about 200,000 “actual” new cases each day at present. But even so, this level is below any time since Delta first hit in summer 2021, with the exception of last autumn and this spring’s lulls.

Hospitalizations show a similar pattern. They are currently down 50% since their summer peak, at about 25,000/day:



This is also below any point in the pandemic except for briefly during September 2020, the May-July 2021 low, and this past spring’s lull.

The CDC’s most recent update of variants shows that BA.5 is still dominant, causing about 81% of cases, while more recent offshoots of BA.2, BA.4, and BA.5 are causing the rest. BA’s share is down from 89% in late August:



But this does not mean that the other variants are surging, because cases have declined from roughly 90,000 to 45,000 during that time. Here’s how the math works out:

89% of 90k=80k (remaining variants cause 10k cases)
81% of 45k=36k (remaining variants cause 9k cases)

The batch of new variants have been dubbed the “Pentagon” by epidmiologist JP Weiland, and have caused a sharp increase in cases in several countries in Europe and elsewhere. Here’s what she thinks that means for the US:


But even she is not sure that any wave generated by the new variants will exceed summer’s BA.5 peak, let alone approach last winter’s horrible wave:



In summary, we have having an autumn lull as predicted by the seasonal model. There will probably be a winter wave, but the size of that wave is completely unknown, primarily due to the fact that probably 90%+ of the population has been vaccinated and/or previously infected, giving rise to at least some level of resistance - a disease on its way to seasonal endemicity.

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Government

JOLTs jolted: Did the Fed break the labour market?

In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure…

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In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure of demand for labour, fell to 10.1 million. This was short of market estimates of 11 million and lower than last month’s level of 11.2 million.

It also marked the fifth consecutive month of decreases in job openings this year, while the August unemployment rate had ticked higher to 3.7%, near a five-decade low.

In the latest numbers, the total job openings were the lowest reported since June 2021, while incredibly, the decline in vacancies of 1.1 million was the sharpest in two decades save for the extraordinary circumstances in April 2020. 

Healthcare services, other services and retail saw the deepest declines in job openings of 236,000, 183,000, and 143,000, respectively.

With total jobs in some of these sectors settling below pre-pandemic levels, the Fed’s push for higher borrowing costs may finally be restricting demand for workers in these areas.

The levels of hires, quits and layoffs (collectively known as separations) were little changed from July.

The quits rate (a percentage of total employment in the month), a proxy for confidence in the market was steady at 2.8%.

Source: US BLS

From a bird’s eye view, 1.7 openings were available for each unemployed person, cooling from 2.0 in the month prior but still above the historic average. 

The market still appears favourable for workers but seems to have begun showing signs of fatigue.

Ian Shepherdson, Economist at Pantheon Macroeconomics noted that it was too soon to suggest if a new trend had started to emerge, and said,

…this is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in labour demand.

Nick Bunker, Head of Economic Research at Indeed, also stated,

The heat of the labour market is slowly coming down to a slow boil as demand for hiring new workers fades.

Ironically, equities surged as investors pinned their hopes on weakness in headline jobs numbers being the sign of breakage the Fed needed to pull back on its tightening.

Kristen Bitterly, Citi Global Wealth’s head of North American investments added,

(In the past, in) 8 out of the 10 bear markets, we have seen bounces off the lows of 10%…and not just one but several, this is very common in this type of environment.

The worst may be yet to come

As for the health of the economy, after much seesawing in its projections, which swung between 0.3% as recently as September 27 and as high as 2.7% just a couple of weeks earlier, the Atlanta Fed GDPNow estimate was finalized at a sharply rebounding 2.3% for Q3, earlier in the week.

Rod Von Lipsey, Managing Director, UBS Private Wealth Management was optimistic and stated,

…looking for a stronger fourth quarter, and traditionally, the fourth quarter is a good part of the year for stocks.

As I reported in a piece last week, a crucial consideration that has been brought up many a time is the unknown around policy lags.

Cathie Wood, Ark Invest CEO and CIO noted that the Fed has increased rates an incredible 13-fold in a span of just a few months, which is in stark contrast to the rate doubling engineered by Governor Volcker over the span of a decade.

Pedro da Costa, a veteran Fed reporter and previously a fellow at the Peterson Institute for International Economics, emphasized that once the Fed tightens policy, there is no way to know when this may be fully transmitted to the economy, which could lie anywhere between 6 to 18 months.

The JOLTs report reflects August data while the Fed has continued to tighten. This raises the probability that the Fed may have already done too much, and the environment may be primed to send the jobs market into a tailspin.

Several recent indicators suggest that the labour market is getting ready for a significant deceleration.

For instance, new orders contracted aggressively to 47.1. Although still expansionary, ISM manufacturing data fell sharply to 50.9 global, factory employment plummeted to 48.7, global PMI receded into contractionary territory at 49.8, its lowest level since June 2020 while durable goods declined 0.2%.

Moreover, transpacific shipping rates, a leading indicator absolutely crashed, falling 75% Y-o-Y on weaker demand and overbought inventories.

Steven van Metre, a certified financial planner and frequent collaborator at Eurodollar University, argued

“…the next thing to go is the job market.“

A recent study by KPMG which collated opinions of over 400 CEOs and business leaders at top US companies, found that a startling 91% of respondents expect a recession within the next 12 months. Only 34% of these think that it would be “mild and short.”

More than half of the CEOs interviewed are looking to slash jobs and cut headcount.

Similarly, a report by Marcum LLP in collaboration with Hofstra University found that 90% of surveyed CEOs were fearful of a recession in the near future.

It also found that over a quarter of company heads had already begun layoffs or planned to do so in the next twelve months.

Simply put, American enterprises are not buying the Fed’s soft-landing plans.

A slew of mass layoffs amid overwhelming inventories and a weak consumer impulse will result in a rapid decline in price pressures, exacerbating the threat of too much tightening.

Upcoming data

On Friday, the markets will be focused on the BLS’s non-farm payrolls data. Economists anticipate a comparatively small addition of jobs, likely to be near 250,000, which would mark the smallest monthly increase this year.

In a world where interest rates are still rising, demand is giving way, the prevailing sentiment is weak and companies are burdened by excessive inventories, can job cuts be far behind?

The post JOLTs jolted: Did the Fed break the labour market? appeared first on Invezz.

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International

Trade Deficit decreased to $67.4 Billion in August

From the Department of Commerce reported:The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $67.4 billion in August, down $3.1 billion from $70.5 billion in July, revised.August exp…

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From the Department of Commerce reported:
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $67.4 billion in August, down $3.1 billion from $70.5 billion in July, revised.

August exports were $258.9 billion, $0.7 billion less than July exports. August imports were $326.3 billion, $3.7 billion less than July imports.
emphasis added
Click on graph for larger image.

Exports increased and imports decreased in August.

Exports are up 20% year-over-year; imports are up 14% year-over-year.

Both imports and exports decreased sharply due to COVID-19 and have now bounced back.

The second graph shows the U.S. trade deficit, with and without petroleum.

U.S. Trade Deficit The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Note that net, imports and exports of petroleum products are close to zero.

The trade deficit with China increased to $37.4 billion in August, from $21.7 billion a year ago.

The trade deficit was slightly lower than the consensus forecast.

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