China equities outlook Bin Shi: COVID-19 has not changed the investment playbook for China

Bin Shi, Head of China equities shared with us five investment nuggets on investing in China as it steers out of the pandemic.

28 May 2020

5 investment nuggets on investing in China post COVID-19

  1. China's economy is on the right track to recovery
  2. China's companies delisting from the US is a manageable risk
  3. US-China tension has moved beyond trade
  4. Second wave of COVID-19 outbreak will not be in the same magnitude as the first
  5. COVID-19 has not changed the investment playbook for China


China equities outlook 1. China’s economy is on the right track to recovery

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, the roads are more crowded 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.

Degree of congestion in 46 large cities

Source: AlphaWise, Morgan Stanley Research, as of 30 April 2020

China equities outlook 2. China companies delisting from US exchanges is a manageable risk

Delisting has been discussed a few times previously and the Equitable Act was a subject of debate last year too. We think this is a manageable risk as, even if it were to go ahead, it would take a few years to be implemented, and companies have time to react.
In a bad case scenario, Chinese companies will get delisted after three years of non-compliance. By then, most of the ADRs should be able to list in HK. Hong Kong would benefit from increased flows. Alibaba has already listed in HK last year, in addition to their ADR in the US, and other companies are preparing similar plans. 
While this might mean that a subset of US investors might no longer be able to buy these stocks – southbound investors from China would now have access to them through the Stock Connect programs.

In a good case scenario, delisting is more of a national security and disclosure issue and an agreement can be reached between the US' SEC and China's CSRC on audit procedures.

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China equities outlook 3. US-China trade tension has moved beyond trade

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.

China equities outlook 4. Second wave of COVID-19 outbreak will not be in the same magnitude as the first

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

China equities outlook 5. COVID-19 has not changed the investment playbook for China

With most of China in lockdown in the first quarter of this year, China’s GDP growth dropped significantly. China has also not set an explicit target for 2020. 

Does this change the playbook for investing in China equities?

Not really.

In many ways the decision to not set an explicit target is a prudent response to deal with the post COVID-19 world. Setting a GDP target will mean that the central government has to give growth targets to local governments. This runs the risk of local officials rushing to enact policies to achieve their given goals which may not be good for the economy in the long run.

For me and my team, we don't really focus too much on GDP numbers because the long-term fundamental trends in China remain intact. Despite the disruption caused by the COVID-19 pandemic, themes like urbanization, premiumization (lifestyle upgrading), innovation, and China's aging population continues to gain traction. Our China equities portfolios are focused on selecting winners within these themes.

Markets have reacted nervously to the COVID-19 outbreak and that is not unexpected. Our way to counteract this is to keep our cash levels are a little higher than normal. We will put more cash to work when we feel the time is right.

Bin Shi: Top Baijiu makers have not dropped their prices despite the COVID-19 outbreak

China: Baijiu volume CAGR (2018-2023E)

Source: IWSR, NBS, Canback, Bernstein analysis & estimates, updated September 2019

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