China - Equity opportunities in the market

Bin Shi, UBS Asset Management Head of China Equities, answers key questions

02 Jul 2020

China has been at the center of the news for the past six months, but few investors are aware of how well China's markets have performed. In this exclusive article, Bin Shi, UBS Asset Management Head of China Equities, answers key questions on the equity investing outlook for China and prospects for the economy.

How has the Chinese government acted to control the COVID-19 outbreak and what steps has it taken to support the economy?

Bin Shi: China took very serious measures early, such as enforcing working from home, social distancing, closure of bars/restaurants and public meeting spaces, and strict controls on flights arrivals.

On the economic side, we have seen a whole range of targeted policies to support the economy, such as support for small businesses and easier monetary policy.

What sectors benefited during the COVID-19 outbreak?

COVID-19-induced changes in behavior have accelerated the shift from offline to online services, benefiting business segments like after-school tutoring, financial services, and healthcare diagnosis.

The online education is one sector that has benefited in particular.

Top online education companies have seen a huge increase in downloads during the Covid-19 outbreak and we feel that the best companies in these spaces have the potential to further grow market share. Online games are another sector that has benefited from increased players during the outbreak period.

More widely, companies are also stepping up investment in R&D and innovation, and there is growing demand for automated solutions.

Additionally, the COVID-19 outbreak is spurring consolidation within many industries in China, and we see that as an opportunity for industry leaders to grow in size.

Are you concerned about a second wave of COVID-19?

The first wave of COVID-19 was an out-of-the-blue event, much like an earthquake and the world wasn't either prepared or clear about what to do to handle the situation.

Now I believe both people and government authorities are much better prepared than they were before and will have a more effective way of handling any outbreaks in the future.

As such, I believe a second wave of similar magnitude to the first is highly unlikely.

Is China back to normal now?

China's economy is certainly improving, but we have yet to return to pre-crisis levels.

Proxy indicators like traffic congestion levels may suggest a recovery since they are higher than last year.

However, these levels are higher because people are social distancing and avoiding public transport.

So it is important to remain cautious about the outlook but we feel confident that the economy is on the right track to recovery, although it may take some time to get there.

China's GDP growth dropped in 1Q20 and China has not set an explicit GDP target, are you concerned about this?

Not really. In many ways the decision to not set an explicit target is a prudent response.

Giving targets to local governments runs the risk of local officials rushing to enact policies to beat the target, which may not be good for the economy in the long run.

COVID-19 has impacted the economy but has it changed prospects for the themes you focus on?

For us, we don't really focus too much on GDP numbers, we are more focused on long-term fundamental trends, like urbanization, premiumization, research & development and innovation, and China's aging population, and we believe these remain intact, despite the disruption caused by the COVID-19 pandemic.

What's the outlook for the US-China relationship?

US-China tensions are likely going to be around for a long time and these have moved beyond trade to technology, capital markets and more. In addition, it is not unusual to expect the current US administration to be tough towards China in the run-up to the US elections in November.

Current tensions are also related to the COVID-19 outbreak and we are seeing some of the blame for COVID-19 being put on China, and that is creating a lot of bad sentiment.

We expect tensions to continue at least up to the elections, and that will likely create more volatility in the market.

However, for active investors like ourselves, volatility creates opportunities for us to take advantage of, especially if good quality companies with strong long-term prospects become oversold.

What is your strategy currently?

Our cash levels are a little higher than normal, but we feel that is prudent given current market conditions. We will put more cash to work when we feel the time is right.

Our focus remains on identifying quality companies that can withstand difficult times and outperform the market and their peers over the long term.

Given the inefficiencies and alpha opportunities present in China, we believe that our active approach should produce strong returns for investors over the long-term, as it has done in the past.

Choose China now

So for investors looking to the future, we'd encourage them to take a close look at China now.

Official data shows that a gradual recovery in China is underway, and potentially earlier than the rest of the world.

More than that, many of the ground-breaking innovations that will change our lives in the future, like 5G technology, quantum computing and drone mobility, are all being driven by Chinese companies. So it makes sense to choose the right partner now who can identify those companies and benefit from their future growth stories.

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