GBA could benefit from escalating trade tensions

written by Jean Chua

Trade tensions? No worries. China's Greater Bay Area could very well benefit as China and the US continue fighting it out.

The recent escalation in tensions between China and the US could prompt the Chinese government to move forward the schedule for certain initiatives for the Greater Bay Area (GBA), which will boost its attractiveness as a long-term growth opportunity.

In fact, it might be a good time to consider GBA-themed stocks as the recent correction has narrowed their valuation premium – versus the broader Hang Seng Index; it is now well below its five-year average, say Eva Lee and Dennis Lam, analysts of UBS Global Wealth Management CIO.

In a 10 June report, Lee and Lam say that MSCI China and our GBA thematic basket have corrected by -12.6 percent and -9 percent, respectively, since the inception of the GBA theme.

"We view current levels to be attractive for positioning into our recommended Equity Preference List," they say. "Our GBA picks are projected to deliver premium earnings growth of 10 percentage points over the market's 3.8 percent in the coming two years."

Lee and Lam say that according to their recent channel checks, the Chinese government has stepped up its support for technology startups in Shenzhen. These include tax subsidies, expanded channels for capital-raising, and beefed-up pilot programs to nurture the development of China's software industry.

These initiatives have prompted a rerating for Chinese software companies, they say.

In addition, the government will support the development of IT security software, infrastructure software and cloud services. In light of the White House's technology restrictions, the Chinese government has upped its support for local software vendors to develop a compatible domestic ecosystem, they add.

"For China, the ban on Huawei further illustrates the potential risks of relying on foreign-sourced components and the urgent need to develop home-grown technologies," Lee and Lam explain. "We believe the increased government support for IT and software companies will further cement the importance of Shenzhen as China’s technology and innovation hub."

"Greater policy and funding support should accelerate technological developments and expand the overall innovation industries in Shenzhen, which in turn would have positive spillover effects on the other industries within the GBA."

The government could also bring forward the schedule for

  1. greater government infrastructure investment in the GBA;
  2. policies (tax, capital and other fiscal support) to nurture domestic IT and software development; and
  3. increased capital-raising activities in the GBA.

This will boost the turnover of China's equity market, they say.

"Even though the tensions have weakened macroeconomic conditions, we still believe the GBA will remain one of the fastest-growing regions in China thanks, in part, to Beijing's robust support," the analysts add. "Indeed, the GBA will remain the home base for China's innovation and technology industries, the development of which is a priority for the government."

For more information, please see CIO report "Chinese equities: Escalating tensions strengthen GBA development (PDF, 2 MB)".