Emerging markets | China Is the worst over for China equities?

We posed three questions to Bin Shi to hear his thoughts on developments in China. Read our fireside chat with him.

01 Sep 2018

Should investors fear the slowdown in China?

Investors need to remember that, despite slower growth, fundamental changes are happening in China's economy, including a shift to a consumer- and services-driven economic model, that still have much longer to run.

Furthermore, China is also on a better footing today compared to a few years ago from a fundamental perspective because the quality of growth continues to improve and companies have shown solid and stable fundamental growth overall.

As such, we believe investors should focus less on GDP numbers and focus more on where to find quality companies well-positioned to benefit from the profound structural changes happening in China, and we see attractive opportunities in 'new economy' sectors like consumer, healthcare, IT, and insurance.

Is the worst over for China equities?

In recent months, markets have seen weakness, caused by deleveraging policies and new regulations on the asset management industry in 1H18, and the escalation of China-US trade frictions.

We see the market going through two resetting stages:

  1. investors are resetting their over-expectations about market prospects; and,
  2. valuations are being reset also. So far this year, some of the companies have corrected due to factors that are unrelated to fundamental growth. We feel we are closer to the end than the beginning of these resetting processes.

However, in the short-term, even though valuations have come down, it doesn't mean that the market is about to rebound immediately.

Investors need to see stronger evidence that conditions have improved to be more confident. Catalysts could include an improvement in the China/US trade relationship and appropriate policy responses by the Chinese government.

It is difficult to forecast how things will develop but our bottom-up stock selection still allows us to find good investment opportunities. Even during poor market conditions, structural opportunities may still arise.

Fundamentally, we maintain our long-term focus on new economy companies in the IT, healthcare, and consumer space, since the underlying long-term drivers for these sectors remain intact.

no reason to turn negative on China equities

Hear Bin explain why.

Will there be a compromise in the US/China trade wars?

We are paying close attention to this topic, but the negotiation path is hard to predict.

A prolonged period of uncertainty could have a negative impact on production and investment sentiments. But we still think there's a chance for a compromise and it's a positive sign that the two sides are talking.

Ultimately, both sides will get hurt by a trade war, so we think it is in both sides' best interest to seek a solution.

At the company level, companies in the export industry with high exposure to the United States will be affected.

However, as we look at our investment strategies, we believe that our portfolios are less sensitive to the trade shock as we are focused on the domestic growth story within China and we have been tilting our portfolios toward domestic consumption-related stocks.

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