MSCI inclusion of China A shares to 20% in its emerging markets benchmark could help herald long-term reform to China’s capital markets. This means the opportunity in China equity just got bigger. More
Bin Shi shared his thoughts on China and opportunities in the Year of the Pig in a recent fireside chat. Here’re 5 key takeaways
- Trade tensions and deleveraging policies weighed on markets in 2018, but the macro outlook for 2019 looks better;
- Policy support and easing of trade tensions will improve sentiment in 2019 – putting more cash to work now;
- Valuations for high-quality companies have come down and are attractive vs. historical levels;
- Healthcare and education sectors have excellent long-term growth prospects;
- Investors should stay disciplined and focus on the 'new economy' sectors and companies leading China's economic transition.
UBS Asset Management wishes you happiness, good health and wealth in the Year of the Pig.
What will the Year of the Pig bring for the China market?
In 2018, US-China trade tensions and the Chinese government's deleveraging policy impacted the economy and markets, so performance came in below expectations.
We see better prospects in the Year of the pig because we believe that China and the US will resolve their trade issues and that the government will ease back on their deleveraging policies and deliver support for the economy.
Because investor sentiment suffered in 2018, many high quality companies saw their valuations come down significantly, so we think there is room for good quality companies to perform in 2019.
Is it good to put more money to work in Chinese equities in the Year of the Pig?
We have been putting more cash to work because we believe valuations for many high-quality companies look attractive.
Furthermore, we believe the policy support measures announced by the Chinese government will begin to positively impact the economy and the market later on in 2019, so we believe we have to be positioned now.
We have seen many new regulations on China's education sector, why do you still remain positive on the prospects for the sector?
China's education sector is well-set for strong demand over the long term, with 160 million students in the K-12 age range. As for new regulations, we think they are a positive change for our investment outlook.
The new policies will likely push small-and-medium companies out of the sector and open up opportunities for larger, well-resourced players to increase their market share.
Putting together the large addressable market for education services and the opportunity for larger names in the sector to add market share, we are positive on the outlook for the sector.
That said, we remain highly selective and we are only looking to invest in the highest quality companies in the sector who have the potential to lead over the long term.
Health is wealth and you continue to be optimistic on China’s healthcare sector. Can you give us 3 reasons why?
Firstly, average per capita spending on health in China at USD 425 per year is relatively low compared to the global average of USD 1,001, so there's lots of space for it to increase and grow.
Secondly, China's population is ageing rapidly and creating a lot more demand for healthcare services and, thirdly, China's healthcare industry is still at very early stages of growth and development.
It's true that the new regulations have impacted investor sentiment, but we still remain positive on the sector because we believe the above fundamentals still have a lot of room to grow and we are focused on finding and investing in companies that are best-positioned to lead the sector over the long term.
What do you think will be the main driver for the Chinese economy going forward?
China's 'demographic dividend' and low land prices have been major contributors to China's past growth.
Looking forward, these factors will still be big drivers but the key factor driving China in the future will be further reforms to release the potential of Chinese companies.
After a challenging year with trade tensions and the future prospect of slower economic growth, China investors may have turned more conservative. What advice can you give to investors in the Year of the Pig?
Investor sentiment deteriorated in H2 2018 but that's an opportunity for disciplined investors because it means cheaper valuations for good quality companies.
And don't forget that, despite market volatility, fundamental growth drivers, like consumer demand and urbanization, still have a long way to run. Take urbanization for example. If you are in a modern city like Shanghai, you'd probably think that the process has run its course, but if you went to other areas in China you'd find there is still room for urbanization to grow.
So I'd remind investors not to pay too much attention to headline GDP numbers. Doing that means you may miss out on the fundamental and long-lasting structural changes happening in China's economy and society that are creating attractive investment opportunities, particularly in new economy sectors.
Head of China Equities
Top China Equity
Manager to Watch1
rated fund manager2
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