Bin Shi: positive on China equities in the Year of the Rat

The Year of the Pig was a strong one for China equities. And Bin Shi, Head of China Equities believe that investors should continue to stay positive as the Year of the Rat comes to reign.

23 Jan 2020

UBS Asset Management wishes you happiness, good health and wealth in the Year of the Rat.


Why is the Year of the Rat good for China equities?

For starters, Chinese horoscopes associate the Year of the Rat with success, wealth and surplus – three things all investors can aspire to. For China Equities, I see three reasons to stay positive:

1. Resilient earnings growth

Despite the slowdown in China, I continue to see companies with strong earnings growth. This is especially true for non state-owned, new economy companies.

And the increase in company earnings (for new economy stocks) over the last 4-5 years has driven more than 70% of market performance. 2020 will not be different in that earnings growth (rather than higher PE valuation) will determine market performance.

Returns of new economy driven by solid earnings growth

New China performance breakdown (%)

Source: Factset, Goldman Sachs Research, as of October 2019

2. Supportive policies

While we do not expect the Chinese central government to roll out a large scale stimulus package next year, policies will likely be supportive and targeted.

Reforms of state-owned enterprises (SOEs) can be a potential wild card that could unlock hidden value in many Chinese SOEs. We may see some opportunities in SOEs in 2020.

3. Reasonable valuations

China equities in both A share and offshore markets do not look expensive as we head into the Year of the Rat. In fact, China stock market valuations are amongst the lowest in the Asia region currently.

While we have reasons to be positive, we are cognizant that US-China relations remain uncertain and this rivalry could perhaps run for a longer period of time.

China equities are not expensive

12-month forward P/E ratio over ten years

Source: Factset, MSCI, UBS Asset Management, as of 31 December 2019. Past performance is not indicative of future results.

What is your focus in the Year of the Rat?

Those born in the year of the rat are known to be intelligent and quick thinking.

This year, we will continue to focus on company management with such traits. I can’t emphasize enough on the importance of good management – it differentiates the quality companies from the rest.

Geopolitics was a strong force last year and is likely to remain in the background for a while. This makes focusing on quality companies a priority.

After the strong run-up in China stocks last year, we expect performance of good and bad companies to diverge. If you’ve invested based on hearsay and short-term expectations, it would be hard to keep performing well. As the cycle wears on and as growth slows, companies without strong fundamentals are likely to be sold down.

Subscribe now

Perspectives matter. Tune in to our insights.

Is there a secret bait to attracting wealth this year?

Secret baits? Baits for rats may not be difficult to lay. But to build wealth, it’s hard to rely on secret baits or formulae. The UBS-AM China equities team has been successful and I think this comes down to three elements:

1) Clear investment philosophy

Our investment philosophy gives us a framework to think about the companies we want to own. For us, owning good, high-quality franchises is important. This means companies with strong management, companies that invest for the future even if they are already doing well.

We are also high-conviction investors. It is better to take meaningful stakes in stocks you understand well than to spread out your bets out too thinly.

2) Robust process

Having the right investment philosophy may point us to the right path but it may not get us the portfolio of stocks we need. This is where a well-developed process comes in. The team needs to be able to execute the ideas – be it trade orders or following portfolio guidelines.

3) Strong team

Needless to say, we need a strong, cohesive team to put our philosophy and process to work.

We trade in the secondary stock market and there’s no monopoly on the stocks we own. Everything we have, anybody can own them too. The difference (with our peers) comes down to getting the three elements right to the T.

Your flagship China offshore fund is now at USD 10 billion. Has it become too big to manage?

Yes clients might worry about capacity. But opportunities continue to present themselves. China's equity markets and economy are growing rapidly and we see exciting new sectors emerging constantly.

And yes, this elephant can still dance!

Our onshore fund is not the only way to tap into China’s growth. We introduced our All China equity solution to help investors capture high-growth segments be it in the onshore or domestic A share market.

Bin Shi

Head of China Equities

Postscript note on the coronavirus outbreak

The coronavirus is a wildcard and its impact is hard to quantify. Our current base case is that the virus meaningfully impacts Chinese consumption growth in Q1 and then subsequently fades, setting the stage for a sharp rebound. The real impact is more on travel, tourism and consumption related industries but we’d expect this impact to start fading as and when the outbreak has passed its peak. As a comparison, SARS is estimated to have cost the Chinese economy 0.5% points of economic growth in 2003. An expected slowdown in the Chinese economy might have an impact on the more cyclical sectors of energy and materials in EM ex China.

Importantly, the Chinese authorities have the full policy mix at their disposal to mitigate any more protracted negative impact should it prove necessary: further moderate easing through cuts in benchmark interest rates, and on the fiscal side through increasing government spending on infrastructure investment and other high multiplier spending initiatives. Already, we have seen the Chinese government proactively announce a liquidity injection into the Chinese banking system ahead of the market re-opening to shore up financial markets.

It’s still too early for us to draw any formal conclusions to the “catch up correction” we’ve seen with the China market open, but a lot of the initial sharp drawdown is likely a result of Chinese retail investor fear and uncertainty being priced into markets which have been closed over the past week. With full details about the global spread of the virus, its symptoms, incubation period and mortality rates unclear, investors are behaving entirely rationally in the face of uncertainty by selling risk assets and buying safe havens. We cannot say with confidence how or how quickly things are likely to progress. But human tragedy aside, history would suggest that such epidemics have a limited short-term impact on the wider economy that is often followed by a sharp rebound, as pent-up demand is unleashed. We suspect this particular risk will end up an opportunity to accumulate exposure to names we like at more attractive valuations. We continue to monitor the situation and stock prices and are prepared to make portfolio changes at the appropriate price points. There are certain stocks we are keeping an eye on as possible add/buy candidates at the right price points. Overall, we expect this outbreak to have negligible impact on the markets and our portfolios in the medium to long term.

  • This outbreak should accelerate the move from offline to online across a number of business. Hence, companies like Tencent and Alibaba should be long-term beneficiaries.
  • Companies like TAL Education may suffer in their offline (physical classrooms) business in the short term but should benefit in their online business longer term – TAL’s online revenues have been growing fast off a small base, and they are much better positioned than their competitors in this segment – their market share gain should hence get accelerated.
  • Domestic liquor companies like Kweichow Moutai (Moutai) might also be impacted in the short term but this will be mitigated by a few factors: the premiumization trend remains intact, people are still willing to buy ultra-premium liquor at lower prices, liquor has much longer storage life than most other food & beverage items, and Moutai’s sales are to distributors who might take this opportunity to top up on inventory.
  • In healthcare as well, while there may be negative short term impact as the outbreak can potentially reduce patient flow since hospitals are high-risk locations for infection, some companies stand to benefit directly from supplying medicines (e.g. anti-viral drugs) and supplies to deal with the virus.

References to securities are not buy or sell recommendations.

More insights

Singapore Retail Investors


This website is not intended for and should not be accessed by persons located or resident in any jurisdiction where (by reason of that person's nationality, domicile, residence or otherwise) the publication or availability of this website is prohibited or contrary to local law or regulation or would subject any UBS entity to any registration or licensing requirements in such jurisdictions. It is your responsibility to be aware of, to obtain all relevant regulatory approvals, licenses, verifications and/or registrations under, and to observe all applicable laws and regulations of any relevant jurisdiction in connection with your entrance to this website. Each investment product and service referred to on this website is intended to be made available only to residents in Singapore.

UBS reserves the right to change, modify, add or remove content on the website as well as these terms at any time for any reason without notice. Such changes shall be effective immediately upon posting. You acknowledge that by accessing our website after we have posted changes to these terms, you are agreeing to these terms as modified.

The materials on this Website are distributed by UBS Asset Management (Singapore) Ltd (company registration number: 199308367C), which is licensed by Monetary Authority of Singapore ("MAS") in Singapore pursuant to the Securities and Futures Act (Chapter 289 of Singapore). UBS Asset Management (Singapore) Ltd is part of the Asset Management business division of UBS Group AG. UBS Asset Management (Singapore) Ltd together with UBS Group AG and its group companies shall collectively be referred to as "UBS".

The information contained in this Website has been prepared and is intended for general circulation. The information does not constitute advice and does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The investment services or products referred to in this Website may not be suitable for all investors. UBS recommends that you independently evaluate particular investments and strategies and seek independent advice from a financial adviser regarding the suitability of such investment products, taking into account your specific investment objectives, financial situation and particular needs, before making a commitment to purchase any investment products. Investment involves risks. You should be aware that investments may increase or decrease in value and that past performance is not indicative of future performance.

The information contained in this Website is not an offer to buy or sell or the solicitation of an offer to buy or sell any investment product or to participate in any particular trading strategy. UBS, its officers and/or employees may have interests in any of the investment products referred to on this Website by acting in various roles. UBS, its officers and/or employees may receive fees, commissions or other benefits for acting in those capacities. In addition, UBS, its officers and/or employees may buy or sell investment products as principal or agent and may effect transactions which are not consistent with the information set out in this Website.

You fully understand and agree that, by making available this Website, UBS should not be construed as making: (a) any endorsement of any investment product referred to in this Website; (b) any representation that UBS has performed any due diligence on any investment product referred to in this Website; or (c) any representation that the information in this Website is complete, accurate, clear, fair and not misleading. The use or reliance on any such information contained in this Website is at your own risk and any losses which may be suffered as a result of you entering into any investment are for your account and UBS shall not be liable for any losses arising from or incurred by you in connection therewith. UBS is not responsible or liable for the accuracy and completeness of any such information or the performance or outcome of any investment made by you after receipt of such information, irrespective of whether such information was provided at your request.

Using, copying, redistributing or republishing any part of this Website without prior written permission from UBS is prohibited. Any statements made regarding investment performance objectives, risk and/or return targets shall not constitute a representation or warranty that such objectives or expectations will be achieved or risks are fully disclosed. The information and opinions contained in this Website is based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any misrepresentation, errors or omissions. All such information and opinions are subject to change without notice. A number of comments in this Website are based on current expectations and are considered “forward-looking statements”. Actual future results may prove to be different from expectations and any unforeseen risk or event may arise in the future. The opinions expressed are a reflection of UBS’s judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed.

UBS does not hold out any of its officers and/or employees as having any authority to advise you, and UBS does not purport to advise you on any investment product. Any investment will be made at your sole risk and UBS is not and shall not, in any manner, be liable or responsible for the consequences of any investment.

This Website and its contents are provided on an “as is” and “as available” basis. UBS does not warrant: (a) the accuracy, timeliness, adequacy commercial value or completeness of this Website or its contents, and expressly disclaims any liability for errors, delays or omissions in the contents, or for any action taken in reliance on the contents; (b) that your use of and/or access to this Website or its contents, will be uninterrupted, timely, secure or free from errors or that any identified defect will be corrected; (c) that this Website or any content will meet your requirements or are free from any virus or other malicious, destructive or corrupting code, agent, program or macros; (d) that any information, instructions or communications posted or transmitted by you through this Website is secure and cannot be accessed by unauthorised third parties; and (e) that use of the contents in this Website by you will not infringe the rights of any third parties. No warranty of any kind, implied, express or statutory, including but not limited to the warranties of non-infringement of third party rights, title, merchantability, satisfactory quality or fitness for a particular purpose and freedom from computer virus or other malicious, destructive or corrupting code, agent, program or macros, is given in conjunction with this Website.

You hereby agree to indemnify UBS and any of its officers, employees or agents against, and to keep UBS and any of its officers, employees or agents harmless from, any claims (actual and threatened), settlement sums, liability, loss, damages, costs (including solicitor and client costs and expenses (legal or otherwise)), charges, expenses, actions, proceedings, whether foreseeable or not which we may sustain, suffer or incur, directly or indirectly out of or in the course of or in connection with any the following: (a) any use of this Website or the contents by you, or any part thereof; (b) UBS having made available the Website; (c) any breach of these Terms by you, however arising; or (d) any negligence, act or omission, wilful default, unlawful act, fraud and/or misconduct on your part or violation of any rights of another person or entity by you.

The funds referred to in this Website have been authorised or recognised by the MAS for sale to the public in Singapore (the “Funds”). Copies of the registered Singapore prospectuses ("Prospectuses") referred to in this Website have been lodged with and registered by the MAS. The MAS assumes no responsibility for the contents of the Prospectuses. The registration of the Prospectuses by the MAS does not imply that the SFA or any other legal or regulatory requirements have been complied with.

MAS registration is not a recommendation or endorsement of a Fund nor does it guarantee the commercial merits or performance of such Fund. It does not mean that a Fund is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. UBS Asset Management (Singapore) Ltd has been appointed as the representative for the Funds in Singapore for the purposes of performing administrative and other related functions relating to the offer of Shares under Section 287 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA") and such other functions as the MAS may prescribe.

You may not assign your rights under the Terms without our prior written consent. UBS Asset Management (Singapore) Ltd may assign our rights under the Terms to any third party.

No person or entity who is not a party to the Terms shall have any right under the Contracts (Rights of Third Parties) Act, Chapter 53B of Singapore or other similar laws to enforce any term of the Terms regardless of whether such person or entity has been identified by name, as a member of a class or as answering a particular description. For the avoidance of doubt, this shall not affect the rights of any permitted assignee or transferee of the Terms.

These Terms shall be governed by, and shall be construed in accordance with, the laws of Singapore. The courts of Singapore shall have exclusive jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with these Terms and, for such purposes, you agree to submit  to the jurisdiction of the courts of Singapore. Each party hereby waives any objection which it might at any time have to the courts of Singapore being nominated as the forum to hear and determine any proceedings and to settle any disputes and agrees not to claim that the courts of Singapore are not a convenient or appropriate forum.

© UBS 2020 - the key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.