Why China equities remain attractive?

Bin Shi explains why and how to do it right.

China has done a good job of controlling the COVID-19 pandemic, but the impact varies across different sectors.

We can see that the COVID-19 outbreak has accelerated a series of trends in China, such as: ongoing consolidation within many industries in China as smaller firms struggle; the shift from offline to online across business segments, including after-school tutoring, financial services, healthcare diagnosis; and investment in R&D and innovation, driven by growing demand for automated solutions.

Turning to US/China tensions, we believe that US-China rivalry will be here for a long time and has moved beyond trade to technology, capital markets and more.

However, a complete decoupling between the two countries is highly unlikely because China continues to be a huge manufacturing power base for the global economy, and many industries, such as pharmaceuticals, rely a great deal on China for supplies. 

Additionally, many foreign companies rely on China a great deal as a final market, and surveys show that the majority intend to maintain their operations in China.

We remain constructive on the market outlook, and we expect liquidity conditions will likely continue to remain accommodative.

Looking more specifically at the China equity market, there has been a recovery, but current valuations remain well within their historical trading ranges and that China equities continue to offer attractive return opportunities.

Many companies are benefitting from the trends described above, and that many firms reporting strong growth numbers, despite the impact on the wider economy of COVID-19 and trade tensions. 

We need to remain nimble and respond to market changes by keeping some powder dry.

Bin Shi

Head of China Equities

We are focused on the long-term and are well exposed to the names we like. For other names, we may need more time to develop a strong conviction level to invest more.

There's still a lot of volatility in the market, like from Chinese companies being put on US sanction list. 

In this kind of environment, we see such uncertainties having a potential negative impact on some companies, but also creating opportunities for others, so we need to remain nimble and respond to market changes by keeping some powder dry.

Additionally, we expect a number of high-quality companies coming to IPO in the market soon, some of whom we are very positive on, so we want to keep some cash in reserve for these opportunities.

In the past ten years, we have seen an improvement in the quality of Chinese companies and significant re-ratings.

Looking ahead, we expect many more high-quality companies coming from a wide range of sectors in China's markets.

Right now we are seeing a lot of good business models and well-managed companies, now we need to make sure we are buying these good quality names at the right price.

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