July 2020

Talking heads: ‘A fundamental economic shake-up’

CoronavirusThe interplay between Covid-19 and a sustainable economic transition reveals pockets of opportunity – and of risk. Here, we ask investment experts about China, Asian real estate, Vietnam, infrastructure and emerging markets.      
Tian_Ren_CanTIAN REN CAN, CHIEF EXECUTIVE, UBP INVESTMENT MANAGEMENT (SHANGHAI), CHINA What is your investment outlook for China over the next 12 months?
We are optimistic about the A-share market over the next 12 months because:
  • The government has embraced a proactive fiscal policy;
  • China’s central bank implemented a slightly loose monetary policy, and provided adequate liquidity in the domestic market;
  • Outstanding prevention and control of the Covid-19 pandemic facilitated a strong economic recovery;
  • The whole society is more aware of the importance of developing technology-related industries under the backdrop of Sino-US confrontation; emerging industries are developing with more resources, which will elevate the fundamentals and valuations of many relevant enterprises; and
  • China is constantly gaining inflows of ;offshore capital as overseas liquidity is abundant.
Which sectors and themes in China are you most constructive on and why?
We will be focusing on the following sectors and themes, including:
(i) Leading companies in the traditional infrastructure industry. Traditional infrastructure will be a key method for the central government to keep a steady growth. China’s economy was affected severely by the Covid-19 outbreak at the beginning of 2020, the last year in the 13th Five-Year Plan, and therefore, the countercyclical adjustment remains the main choice for the policymakers. Since March, the approvals for infrastructure projects has increased significantly.
(ii) Technology infrastructure, which contains electronics manufacturing, semiconductors, computer applications, computer equipment, communication equipment, internet media, etc. “New infrastructure”, a key idea that will unlock the possibilities of China’s future strategic development, has been adopted by the country and its people while the country is undergoing an economic transformation and the Sino-US confrontation. Meanwhile, the cultivation of technology-infrastructure-related engineers in China over the past few decades has enabled the country to develop this “new infrastructure” project.
(iii) New energy and bio meds. They will meet the need of Chinese people to enjoy an environmentally friendly and secure living space and will keep developing because the demand for a better life will grow constantly. Leading stocks in these two sectors are likely to be seen in the future.
(iv) Finance. Stocks with low valuation may be re-evaluated due to improved social financing data and loosening liquidity.
(v) Traditional infrastructure investment and finance sectors with a lower valuation are in the process of fundamental marginal improvement while technology infrastructure, new energy and bio meds sectors with a higher valuation still have much room for development. Therefore, sectors mentioned in (i) and (iv) are recommended in the asset allocation. Stocks in the sectors mentioned in (ii) and (iii) should be examined and filtered carefully, and leading companies in these industries are recommended. What are the top three investment risks in China?
  • A comeback of the coronavirus. It is not likely that the virus will come back and become widespread in China because the government and the public are well aware of the damage caused by the coronavirus, but we still view it as the most critical investment risk that needs to be assessed.
  • Sino-US confrontation. With 2020 being the election year, China will be a hot topic picked by politicians. Meanwhile, the Trump administration will be a vital role that affects risk preferences periodically because they acted in a way that can hardly be predicted.
  • Overheated market enthusiasm. Historically, the A-share market has high volatility and a trend of “fast bull and slow bear”. A sharp and short increase in the market leads to too much pressure hidden in the curve, and when the market started to fall, the enthusiasm fades away quickly, which hindered another surge in the market.
Among emerging markets (EMs), we are seeing differing responses to the Covid-19 crisis. This bifurcation is likely to translate into market performance – how does China compare to other emerging markets in Asia – and what spillover effect could China have on other economies?
China performed the best in the battle against Covid-19 than all the other emerging markets around the world. There is no need to question the authenticity of the official figures because the data is real and precise. China’s effective control of the outbreak facilitates a faster economic recovery from a temporary shutdown, and its highly developed manufacturing will also help boost the recovery. China is now recovering faster than all the other emerging markets, and even developed economies. This is why we believe China will perform better in the market than other emerging markets over the next 12-24 months, and offshore capital will come into play in the A-share market to earn excessive returns. China is now the fifth-largest global fund domicile after surpassing the UK and France to account for 4.1% of fund assets. What are your expectations over the next five years?
With a deepening financial opening-up in China, the concerns of overseas investors over the A-share market are increasingly declining. China is now putting more emphasis on the emerging industries, which we believe will help the economy transform from a traditional industry-focused structure to a balanced structure with traditional and emerging industries prospering. This will help promote the quality and profitability of listed companies and will finally result in more leading companies with mega market value in those emerging industries. Therefore, we regard the next five years as a golden stage for China’s asset management companies to develop. With increasing capital inflows from home and abroad, the early birds in the industry will enjoy the most benefits through the ongoing development for the asset management industry. In the long run, it is inevitable that China’s asset management industry will reach the top three in the world.

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