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Why this time may be different for Chinese equities

Why this time may be different for Chinese equities

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3 years ago

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In the past, China’s stock markets were prone to boom and bust. After a rally that has seen the CSI 300 index rise by around 17% since March, David Choa, Head of BNP Paribas Asset Management’s Greater China Equities team in Hong Kong, explains why this time may be different for China’s equity markets. 

Compared to the 2015 market cycle and relative to equity markets in other regions, I have no doubt that Chinese equity markets are now on a much better footing. This year’s rally has had a different set of factors driving it.

Strong fundamentals

    • China has so far achieved better control of COVID-19 than many other major economies. The country is close to emerging from the coronavirus tunnel and its real-time economic indicators are largely back to pre-COVID levels. China’s Q2 2020 GDP figures were actually positive! The economy expanded by 4.9% year-on-year in the third quarter with industrial growth driving the recovery. China is likely to be the sole major economy to register positive growth in 2020.
    • China’s economy is now better balanced than in the past. Its constant structural economic reforms are helping it to shift consumption and investment to meet domestic demand, backed by fast-growing, innovative homegrown technology and healthcare champions.
    • If there were to be either a resurgence of COVID-19 in China or greater geopolitical tension, the country would still have considerable fiscal and monetary firepower to maintain stability as the government has shown restraint in such measures in the past few months.
    • China’s authorities today have better control of the balance sheet. Reducing risk in the financial system remains a top priority. They are getting on top of shadow banking to limit market risks. For example, the use of margin lending to buy equities is less prevalent now than it was in 2015. Inflows into Chinese stocks this year reflect increased risk appetite rather than a surge in borrowing.

Highly supportive technical factors

    • While China has until now been underweight in many international investors’ portfolios, in my view, we are seeing the tide starting to reverse. In the post-pandemic world, investors are likely to need a standalone China allocation rather than just holding Chinese stocks via an emerging market allocation.
    • Accelerating reform in China’s capital markets is providing more efficient access to the local market. Foreign investors seem to have been reassured by a more predictable regulatory landscape, underpinned by Beijing’s five-year planning system. The goals are a) to improve the allocation of capital; and b) to develop long-term pension and insurance products that will offer savers an alternative to speculating on property or accepting meagre returns on bank deposits.
    • This year’s renminbi strength reflects overseas money flowing into China’s asset markets. Chinese government bonds currently yield about 3%, dwarfing yields in advanced economies. Leading bond and stock index providers have added China to their main emerging market benchmarks. Beijing is determined not to interrupt this trend. Foreign capital has an important role in developing China’s financial markets and recapitalising the banking system.
    • The effects of quantitative easing 2.0: Liquidity is abundant; investors are looking for regions with economic growth and finding it very little – they see opportunities in China.

Exhibit 1

China’s tech sector is more diverse

There has been much discussion about the fact that a small number of tech stocks have driven the rally in US equities this year. Tech is also a hot segment in China, but the situation is different for several reasons: 

While the US equity market has just a few truly dominant tech players, the sector in China is more diversified:

    • There are more leaders in each segment rather than just one. For example, there are numerous large e-commerce players, none of which dominates the segment.
    • Tech development in many sectors is still in its infancy. China has fast-growing companies across the whole value chain – from upstream to downstream, from hardware to software, cloud and infrastructure.
    • Historically, China’s tech focus has been on consumer applications. It is now shifting to business applications where there is huge catch-up potential versus global peers. This is a key area for growth.

More importantly, it’s not about only tech enablers in China:

  • Consumption
    • The Chinese government is continuing to push for more local consumption, particularly when the economic recovery in the rest of the world is on a weaker footing.
    • Wealth levels have reached an inflection point: China’s consumers want a better lifestyle in terms of education, leisure and food rather than just branded physical goods.
  • Traditional sectors – don’t forget China still has enormous traditional industrial and manufacturing sectors
    • Brands and companies that capitalise upon the digital transformation to improve their image, gain new sales channels (e.g. online) and improve productivity (e.g. better information to flatten distribution channels) are winning market share and are secondary beneficiaries of the tech boom.

Innovation doesn’t stop with tech

    • China is moving up the value chain in the healthcare sector, from globally competitive contact research organisations (CRO) doing cutting-edge research for global biotech firms to medical device manufacturers producing equipment such as computed tomography (CT) scanning and imaging systems. The quality gap with China’s international peers is narrowing and advances are being made at a much lower cost.

Focusing on Chinese equities

Our team focuses on the following three key themes:

Innovation

    • China is devoting resources and placing much emphasis on promoting technology development, to not only escape from dependence on US tech, but also because China has large traditional sectors such as industrials that urgently need to upgrade their productivity. 
    • China is unique in the sense that it is not only a major manufacturing hub; it has a vast domestic market. This gives it more potential synergies and gains on both fronts.
    • In turn, this means the beneficiaries can be found beyond the traditional technology enablers such as the big internet consumer names. Healthcare and even non-tech consumer and industrial companies that can improve their sales and margins via extensive digital transformation will benefit.

Consumption

    • China’s consumers are already beyond the point of wanting simply Western-branded products. They now seek a better lifestyle. The equity market sectors that stand to benefit extend beyond the traditional retail sectors to areas such as education, healthcare and well-being, entertainment and food consumption. Given China’s enormous population, this is a vast market with many emerging local brands that are gaining awareness and winning business from consumers.

Consolidation

    •  As the pace of growth in China moderates after a decade of rapid expansion, companies need to think about more than just revenue. They need to focus more on R&D, productivity and costs. Those with progressive mindsets should be able to increasingly pull away from the competition and drive consolidation. This looks set to happen not only in the old industrial sectors, but also in the new economy.

In our view, these major themes appear likely to stand the test of time, regardless of external factors such as COVID-19. Indeed, the aftermath of the pandemic is accelerating them. These themes are the guiding stars for our portfolio. We use them to generate ideas and inform our positioning.

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 views expressed in this podcast do not in any way constitute investment advice.

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 Daniel Morris. The post Why this time may be different for Chinese equities appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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International

Israel Moves To Shut Down Al Jazeera Over Gaza Coverage

Israel Moves To Shut Down Al Jazeera Over Gaza Coverage

The major Qatari-based news channel Al Jazeera is about to be shut down in Israel,…

Published

38 mins ago

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October 20, 2023

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Israel Moves To Shut Down Al Jazeera Over Gaza Coverage

The major Qatari-based news channel Al Jazeera is about to be shut down in Israel, Gaza and the West Bank by Israeli authorities. It has been accused of "helping Hamas" and encouraging violence against Israel. The ban is likely to include a raid on its offices in Israel.

The Israeli government on Friday approved "emergency regulations" giving it the power to shut down foreign news agencies which are deemed to be acting against the "security of the state". 

AP file image

The first target for shutdown is believed to be Al Jazeera, given its staunchly pro-Palestinian news coverage, which has also rejected Israel's denial of the Al Ahli Arab Hospital bombing and mass casualties. Media outlets ranging from i24 News to Times of Israel are reporting that Al Jazeera is the prime target.

The channel is the largest Arabic language news outlet in the world, and also is a prime global source for English-language updates from within Gaza. 

Israeli Communications Minister Shlomo Karhi has emphasized that Israel was at war on "land, in the air, at sea, and on the public diplomacy front".

According to The Times of Israel, "The regulations are retroactive, meaning broadcasts by the Qatari network since the war started can now be used as the basis for a decision to shut down the staunchly pro-Palestinian news outlet’s local branch."

Karhi called out the major Middle East news outlet by name in his fresh comments. "We will not allow in any way broadcasts that harm the security of the state… The broadcasts and reports of Al Jazeera constitute incitement against Israel, help Hamas-ISIS and the terror organizations with their propaganda, and encourage violence against Israel."

Israel's communications and defense ministers have reportedly agreed to the following sweeping emergency powers:

  • Israel will be able to order TV providers to stop broadcasting the news outlet in question;
  • close its offices in Israel, seize its equipment, and
  • shut down its website or restrict access to its website, depending on the location of its server.

Al Jazeera has frequently alleged that Israel's military targets its correspondents in the field, as was the case with slain Al Jazeera journalist Shireen Abu Akleh, who had been shot in the head by Israeli forces while covering a raid on Jenin in the West Bank in May 2022.

Some online commentators have noticed the parallels with the Zelensky government in Ukraine, who early in the war with Russia moved strongly against media outlets deemed as 'opposition' or 'pro-Russian'. This included a crackdown on Russian-speaking media in general, despite a huge portion of Ukrainian citizens speaking Russian as either a first or second language.

Al Jazeera's live, English-language broadcasts can be accessed via the web. 

Tyler Durden Fri, 10/20/2023 - 14:05

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International

Jordan Out As Speaker Candidate After 3rd Loss

Jordan Out As Speaker Candidate After 3rd Loss

Update (1402ET): House GOP members have voted by secret ballot to remove Jim Jordan as candidate…

Published

38 mins ago

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October 20, 2023

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Jordan Out As Speaker Candidate After 3rd Loss

Update (1402ET): House GOP members have voted by secret ballot to remove Jim Jordan as candidate for speaker, according to Punchbowl News' Jake Sherman, who added that House Republicans are headed home for the weekend and will hold a candidate forum Monday night.

*  *  *

Update (1212ET): Jim Jordan lost his third ballot for speaker after 25 Republicans came out against him.

Republicans will now hold a closed meeting at 1PM ET to discuss whether Jordan should remain the party's nominee for speaker, according to Punchbowl News' Jake Sherman.

Stay tuned for more...

*  *  *

Jim Jordan (R-OH) has apparently called his party's bluff. After losing two votes for speaker (by at least 20 votes), Jordan threatened to take his ball and go home, leaving interim speaker (and Democrat darling) Patrick McHenry (R-NC) in charge until January.

Looks like Jordan's haters hate the idea of 'Speaker McHenry' even more, so Jordan is now holding a 3rd vote, today, right now.

Aaaand he's already got 15 'no's' - so it's another bust. Jordan can lose just 4 Republican votes.

The move comes after former Speaker Kevin McCarthy (R-CA) nominated Jordan for the 3rd round - suggesting that fences have been mended between Jordan and his Freedom Caucus supporters, and McCarthy's centrist camp - which can't wait to give more money to Ukraine (and now Israel).

McCarthy called Jordan an "effective legislator," prompting laughter from Democrats. McCarthy then fired back at them, calling them ineffective on border policy and other issues.

Watch:

Tyler Durden Fri, 10/20/2023 - 14:05

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Government

Global Escalation

Global Escalation

By Jane Foley, Senior FX Strategist at Rabobank

In a televised address last night, President Biden laid out the case for…

Published

38 mins ago

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October 20, 2023

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Global Escalation

By Jane Foley, Senior FX Strategist at Rabobank

In a televised address last night, President Biden laid out the case for US taxpayers to continue supporting both Israel and Ukraine. He stressed that the success of both partners was vital for the US’s national security.  Referencing Putin’s war with Ukraine and the Hamas attack on Israel, he warned that when dictators and terrorists do not pay a price for their aggression and terror, that more chaos, death and destruction is created so that the costs to America and the world keep rising.

According to the US Pentagon, yesterday a US Navy warship operating in the Red Sea shot down three land-cruise missiles fired by Houthi rebels in Yemen which could “potentially” have been headed towards Israel, though there appeared to be some uncertainty about this. US bases in Iraq and in Syria were also repeatedly targeted by drone attacks. This morning, reports are indicating that there has been a rocket attack on US and coalition forces at a diplomatic support centre near Baghdad International Airport. Initial assessments indicate that one rocket was intercepted while another hit an empty storage facility. Additionally, frequent exchanges of fire have been reported along the Lebanese border with Israel between armed militants in Lebanon and the Israeli army which have prompted fears of a larger confrontation. It is widely assumed that a ground offensive by Israel into Gaza remains imminent, though there is no clear consensus as to what is planned after this operation is complete.

Fear of an escalation in the crisis has been reflected in asset prices. Oil prices again pushed higher with Brent crude moving to within a whisker of the USD93.50 level this morning. Gold prices are higher and stock markets are down across the board with futures also in the red. A little comfort was drawn from comments from Fed Chair Powell yesterday in his address to the Economic Club of New York. These promoted the view that rates are likely to remain on hold at the Fed’s next policy meeting on November 1. He highlighted that the committee “is proceeding carefully” and reinforced the data dependency of policy decisions. That said, the door to further rate hikes was not closed. The Fed Chair referenced the strength of demand in the US economy and that of the labour market, but he also spoke about the lags and lack of precision involved in monetary policy.

In China, the PBOC offered a record sum of cash to lenders via a short-term liquidity tool aimed at reversing an increase of funding costs. This should help to boost loans and also potentially demand for government bond issues. 

While the positive growth implications is, in theory, a positive factor for the outlook for Chinese stocks, the CSI 300 has remained on its downtrend this morning reflecting the continuation of fragile sentiment and market demands for further policy support. Bloomberg has reported that overseas investors are on track for a third straight month of selling stocks in Shanghai and Shenzen, with the CSI poised for its worst week in the year. At the same time the FT is reporting that Chinese investors dumped the most US stocks and bonds in four years in August, according to data from the US Treasury. This is likely linked with efforts by Beijing to support the value of the renminbi.  USD/CNY has gained 5.73% in the year to date on the back of widening interest rate differentials.

10 year treasury yields are positioned a little below yesterday’s high this morning as the market continues to speculate about the timing of a breach of the 5% level. Some volatility was injected into the market yesterday afternoon as Chair Powell spoke.  US economic data releases yesterday brought an improvement in the Philly Fed business outlook, though this was still softer than market expectations. That said, the index is well above the 3-year low registered in April. The moderately softer than expected reading for US initial jobless claims brought it to a 9 -month low, though continuing claims rose to a 3-month high. 

Tyler Durden Fri, 10/20/2023 - 13:45

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