Investing in China in the Year of the Ox

Stepping into the Year of the Ox, HSBC Global Asset Management believes that the macro recovery in China will continue to lead the global market in a post-COVID context.

China, which has outperformed the rest of the world in dealing with COVID-19 health crisis, would embark on a transition from extraordinary stimulus to policy normalisation, while offering more targeted relief measures to steer its economy. Consumption and services would emerge as key growth drivers in 2021, supported by improvements in the job market and recovery in household income. In addition, China’s focus on the effective implementation of the new Five-Year Plan (2021-2025) and dual circulation strategy will be key to boosting productivity and long-term growth potential.

As a preferred market in the new year, China offers some exciting investment opportunities in Chinese equities and bonds for investors seeking return and diversification.

Caroline Maurer, Head of China and Hong Kong Equities, HSBC Global Asset Management, said,

“Overall we remain positive about Chinese equities in 2021. Both onshore and offshore Chinese equities continued to rally in the beginning of the new year. Currently, the 12-month forward price to earnings of MSCI China and CSI 300 are trading at 16.9x and 15.9x¹, respectively.

As global recovery gradually takes place, we expect to see a strong rebound in corporate earnings, supported by an inventory restocking cycle and robust exports. Also, a strong RMB could exert a positive effect on earnings and help draw capital inflows into China’s equity capital markets.

A key theme to watch out is government policy. We are seeing the normalisation in fiscal, monetary and credit policies, but there is no abrupt tightening. The new Five-Year Plan signals China’s commitment to a high quality, more balanced and sustainable growth. We would expect a significant increase in R&D spending and advanced manufacturing. Urbanisation reform will also be expected to promote regionally coordinated development.

In terms of sectors, we prefer three major investment themes with long-term growth potential – domestic circulation, digitalisation and green economy.

On domestic circulation, companies in e-commerce, healthcare and education are likely to outperform given they are part of government’s goal to build a service-driven economy. Similarly, technology innovation and technology localisation are key drivers on digitalisation theme, due to the policy support of Five-Year Plan. As the green economy is taking off in China, long-term development of renewable energy and electric vehicles, as well as advanced manufacturing would be the key focuses. We expect China to lead electric vehicle industry development in the next two decades.”

Ming Leap, Associate Director, Fixed Income, HSBC Global Asset Management, said,

“From policy perspective, amidst benign inflation and uneven recovery, PBoC is likely to maintain its accommodative policy while using open market operations to manage market liquidity.

China bond valuations are appealing against the backdrop where a quarter of the global bond market is offering yields in the negative territory. In the offshore USD credit market, bonds issued by Chinese corporates enjoy the so-called “Asian Premium” as they offer attractive valuations and good liquidity with a shorter duration, compared to their global counterparts. China’s USD investment-grade and high-yield debt are trading 170bps and 820bps² over the US Treasury notes in the end of January, offering strong incentives for yield-hungry investors.

The inclusion of Chinese bonds into major global bond indices and, more importantly, the strong demand among global investors who seek diversification, have boosted inflows into the Chinese bond market over the past twelve months. China bond market recorded USD155 billion of inflows in 2020, more than double the USD66 billion inflows in 2019³. This trend of capital inflow is expected to continue, driven by the positive outlook on the currency and the internationalisation of the RMB.

Finally, the overall default rate in China remains relatively low at 1.3% of the total onshore bond market in 2020, as policymakers are allowing more market forces to drive the credit differentiation. The importance of credit fundamental analysis is essential to avoid companies with weak credit metrics and lack of strategic importance.”