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Chinese equities: One-on-one interview

Joy Yuan, Portfolio Manager, Chinese Equities, highlights the key trends driving the equity market and the outlook for the rest of the year
31 January 2020
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    Key takeaways

    • A continued calibrated policy approach will ensure a stabilising or even slightly improving macro economic outlook going into the Year of the Rat (beginning 25th January)
    • Valuation of offshore Chinese equities looks very inexpensive, while the A-share market offers unique/ quality exposure to consumer and technology sectors
    • Thematically, tech and innovative biotech companies offer interesting investment opportunities against the backdrop of the country’s economic rebalancing

    China’s headline economic growth is moderating and is projected to be around 6 per cent in 2020. What’s your assessment of the economy in the Year of the Rat?

    Joy: First of all, the initial trade agreement with the US, which was signed on 15th January, is positive for the macro outlook, alongside the green shoots we’ve seen in global manufacturing and trade.

    Domestically, macro policy easing has succeeded in managing the pace of economic slowdown with an aim to stabilise growth, rather than to drive a significant rebound in economic activity.

    This suggests a calibrated policy approach will stay in place to ensure growth remains at the government’s target level of around 6 per cent.

    Among the three major economic pillars, consumer spending has been stable. For investments, infrastructure investment is expected to pick up under the current policy measures, to cushion against the moderating property investment. At the same time, exports should remain relatively stable and we may see some recovery if the trade tensions ease further.

    In summary, we expect a stabilising, or slightly improving macro economic outlook going into the Year of the Rat.

    Fig 1: China PMI surveys

    China PMI surveys

    Fig 2: China: exports vs. official manufacturing PMI new orders

    China PMI surveys

    Note: * Average of official and Caixin PMIs; # only official PMIs
    Source: CEIC, Bloomberg, HSBC Global Asset Management, January 2020

    In 2019, we saw onshore Chinese equities bounce back from being among the worst performing markets to among the best performing amidst policy support. What’s the 2020 outlook for onshore and offshore Chinese equities?

    Joy: What made the A share theme play out so well in 2019 was actually the beaten down valuations at the beginning of 2019, after an eventful 2018. In addition, resilient corporate earnings added fuel to the rally during the course of the year.

    Onshore-listed China A-shares and offshore listed H-shares gained 36 per cent and 20 per cent in 2019, mainly driven by a mean reversion.

    Looking ahead into this year, a stable macro outlook, resilient corporate earnings, very attractive valuation for a majority of the universe, are all very conducive for offshore Chinese equities to outperform other markets.

    At the same time, we continue to see many potential investment opportunities in the A share space, on a more selective basis

    The market rally in December was mostly led by cyclicals, While in January until now, the consumer and technology names have the leaders. What’s your preferred sectors in the Year of the Rat?

    Joy: We focus on bottom up stock selection rather than taking aggressive directional beta bets. Our research effort is very focused on making internal earnings forecasts and identifying potential earnings surprises ahead of the curve, which has been a major source of alpha generation for us.

    Fig 3: Price-to-earnings (MSCI China)

    Fig 3: Price-to-earnings (MSCI China)

    Source: MSCI, Bloomberg, HSBC Global Asset Management, January 2020

    We prefer companies with quality, structural growth at reasonable prices, and with earnings upside. This includes selective consumer, healthcare, technology and new energy names.

    On the other hand, we are value oriented and value driven. We are looking to add to names that are mostly deviated from their historical means with signs of business improvement, such as stocks within the telecommunications sector.

    Manufacturing upgrade, the pick up in middle class spending and technological advancements were the major investment ideas over the past few years.

    What are some of the key investment themes looking ahead?

    Joy: From an investment perspective, technology remains a big theme. Many tech companies are delivering strong earnings growth and seeing upward earnings revisions, due to better product mix, market share gain, import substitution or new product cycles, ahead of the highly anticipated 5G rollout this year.

    Meanwhile, pre-profit innovative biotech companies offer interesting investment opportunities, as there is a drastic shift in medical insurance spending from generics to innovative drugs ongoing in China.

    However, similar to investing in the technology sector, it requires substantial industry expertise and bottom-up fundamental research efforts. For us, the pick-up in these highly specialised sectors offer great opportunities to generate alpha by leveraging on our team’s expertise, knowledge, and HSBC Global Asset Management’s sophisticated bottom up investment process.

    Fig 4: Dividend yield (MSCI China)

    Dividend yield (MSCI China)

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