Navigating Chinese Equities in 2021
Following the recent correction in Chinese equity markets, valuations are attractive again, presenting attractive opportunities for stock pickers.
For Chinese equity markets, 2021 began with an acceleration of the strong performance of late 2020, followed by a pullback after the Chinese Lunar New Year in mid-February. Richard Pan of ChinaAMC, portfolio manager of the JSS Equity – All China fund, believes that after the recent correction, valuations for many companies are now attractive again and opportunities are getting ripe for stock pickers and active portfolio management.
Economy and Markets
The Chinese economy continues to expand. Real economic growth for 2021 is expected to exceed 8%, while for 2022 the IMF expects between 5-6% of real growth1. The Purchasing Manager Index (PMI) data in March indicates that the manufacturing sector performed well, while the non-manufacturing sector recovered from the pandemic. The numbers showed an increase in external as well as domestic demand. Against this backdrop, the People’s Bank of China will likely tighten its monetary policy, albeit very cautiously so as not to derail the country’s path of economic expansion.
The Chinese government’s anti-trust actions targeting internet giants like Alibaba and recently Meituan are a headwind for parts of the market. Additionally, the developing dynamics in US-China relations need to be monitored closely. As equity market valuations have returned to a reasonable range, the likelihood of another significant correction is now much lower than before. Still, the market may well consolidate for a while further, until it finds new catalysts for clearer directionality.
Navigating Chinese Equity Markets in 2021
A clear overweight in high-growth internet and consumer names allowed the Fund to outperform significantly in 2020. Its outperformance was roughly evenly split across stock selection and sector allocation. However, 2021 is likely to be a year of more-diversified industry allocations, with greater focus on outperformance from stock picking.
In this environment, it is important to rigorously maintain the strategy’s investment process, while also reducing risks and seizing new opportunities. This means a continued emphasis on high-quality growth companies, industry leaders with deep moats in branding or technology, and deep fundamental research. To reduce risks, the portfolio’s positions in high beta and high valuation stocks have been trimmed, while cash levels have been increased in order to have the flexibility to capture new opportunities as they present themselves.
Many attractive opportunities can currently be found in the consumer, advanced manufacturing, and renewable energy space. Below are some interesting examples2 :
- There is heightened demand for luxury goods in China. At the same time, international travel restrictions for Chinese are still in place, which bolsters domestic tourism. Luxury duty-free shops within China, like those on Hainan island of China Tourism Duty Free, find themselves benefiting from both factors.
- A continuing theme in consumer staples is the strong earnings growth in Chinese grain liquor, known as “Baijiu”. Besides the large players, Kweichow Moutai and Wuliangye, mid-sized players like Luzhou Laojiao, with earnings growth of above 20%, can complement an allocation to this field.
- While many Chinese prefer international brands for consumer products like fashion, there are homegrown rising stars as well. ANTA Sports, China’s largest footwear maker, is both a domestic brand increasingly accepted as “cool” by Chinese youth, as well as a collection of internationally acquired brands like “Fila”, and may benefit from consumption growth.
- Finally, in the space of renewable energy, Contemporary Amperex is the world’s leading supplier of electric vehicle batteries with an integrated supply chain and very strong pricing power over its suppliers. As the Chinese government has committed to carbon neutrality by 2060, ChinaAMC expects additional catalysts to emerge in this space. They believe that the demand for storage technology will continue to increase by more than 3-5x in the next decade.
Source: Getty Images
By some estimates, China will become the largest economy in the world already in 2028, only seven years from now. Thus, the most important question for equity investors is not if they should allocate to China, but how they should position themselves within this rapidly growing and changing economy.
The JSS Equity – All China fund will stick to the key pillars of its approach, namely innovation, consumption and health care, as they are secularly driven, and maintain its focus on stock selection within each sector. ChinaAMC believes that the valuations of Chinese equity markets are now at a level that provides ample opportunity for investments to bear fruit over the coming years.
The views and assumptions expressed are no guarantee for future developments and refer to the macroeconomic research of ChinaAMC and Bank J. Safra Sarasin Ltd.
2 The companies presented are provided as example investments and might not be part of the investment portfolio of the fund. The examples are given for illustrative purposes only and do not account for individual circumstances of potential investors.