Overall we remain positive on the mid-term outlook, and maintain our focus on long-term themes.
How is China's economy performing and has it rebounded after the Covid-19 outbreak?
China's economy is recovering. Activity indicators continue to improve on a broad base with manufacturing and non-manufacturing PMI measures rising in June. Factories are mostly back at full production.
In large part that's because Covid-19 has been well-contained: China went into the pandemic first and is ahead of other countries in recovery. Small-scale local outbreaks of Covid-19 in Beijing were brought under control swiftly, reflecting the Chinese government's ability to control the spread.
How has government policy supported the recent China A-shares rally?
The government has stepped in with targeted monetary and fiscal policies, with assurance that more can be done if needed. The government has been more targeted, with their policies focused on stabilizing the economy.
Importantly, the government has stated it has no intention to flood the market with liquidity as it did during the Global Financial Crisis, which led to overcapacity and leverage issues that the economy is still digesting. We think the more targeted stimulus is better and will not cause bigger problems down the road.
What other factors explain the strong momentum in China A-shares recently?
We see four in particular.
Firstly, positive government rhetoric towards the equity market. State media has said a healthy bull market can help foster new opportunities in the crisis.
Secondly, we are seeing rising participation from retail investors in the China A markets, margin financing balances have risen marginally, though not as high as in 2015.
Thirdly, strong momentum year-to-date in mutual fund launches and fundraising, with total funds raised during 1H20 exceeding FY19.
Finally, improving corporate earnings trends.
What's the outlook for 2H20 and beyond?
Many investors are concerned about the recent A-share rally and see similarities to the sell-off seen in 2015.
While we do not think this is a repeat of 2015 as margin financing is not at an alarming level, we recall that we have experienced short term underperformance of the China A strategy then.
Then, the China A portfolio underperformed due to a significant sector rotation from Health Care, Consumers and IT to more economically sensitive sectors, such as Financials and brokerage firms, especially after the rate cut in November 2014.
However we adhered closely to our investment philosophy and performance recovered by 2H15, making up for all losses, and in subsequent years generating very strong outperformance for clients.
We are not surprised to see recent consolidation after the quick rally in June, but we do not expect a deep correction either.
Overall we remain positive on the mid-term outlook, and maintain our focus on long-term themes, such as China’s rebalancing into services and consumption, increasing share of discretionary spending and premiumization, increasing spending on R&D and technology leading to innovations and market consolidation within segments.
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