China's A-Shares in the Year of the Ox

The key theme we see in our outlook for China equities is one of normalization. The current recovery is well on-track and has broadened to exports and consumption, and we think that will continue for the next few quarters. On the policy front, we expect government stimulus policies to gradually moderate. Authorities’ actions on the consumer credit market recently have confirmed that their long-term agenda is to prioritize higher quality, more sustainable growth, and limit further systemic leverage.

As with many economies, the pandemic has accelerated a number of structural trends in China which were already underway. We continue to find the most attractive opportunities in consumption, technology, and healthcare – these are sectors that are capitalizing on the transition of the country to a more consumer-driven economy.

Driving this shift in consumption patterns is the country’s growing millennial population, which at present stands at around 400 million - more than the combined working population of Europe. This has had a huge impact on the technology and e-commerce sectors, cementing China’s position as the world's number one retail market.

Better Living Standards

Wealth accumulation, resulting lifestyle upgrades and greater demand for quality products and services have created a constructive backdrop for industry leaders in consumer staples such as dairy products, snacks and condiments. China’s consumption «premiumization» (i.e. when consumers decide to spend more on everyday household items, switching to a premium equivalent) is gradually driving growth.

As well as this, Chinese consumers across generations are increasingly shifting to online entertainment services, aided by the higher take-up of broadband services. Wireless, or accessing the internet through mobile devices, is also gaining traction. We believe demand for «live» streaming and online entertainment platforms could grow rapidly.

Changing global mobility patterns has also driven increased interest in China’s domestic travel scene. Cross-provincial tourism is regaining momentum, and this could bolster offline consumption, benefitting the tourism-related industries, like Hainan Duty-Free Sales for example. This emerging trend, alongside Hainan Island’s plan to turn into a free trade port by more than tripling its duty-free allowance, is driving overall consumption demand.

Tech in Everyday Life

Tech has gone beyond smartphones and eCommerce in China. Artificial intelligence and cloud computing are becoming a part of everyday life. Amid geopolitical uncertainty, China’s tech industry is increasingly embracing an inward economic pivot, looking to make breakthroughs in core technologies that reduce its reliance on imported software and hardware.

We are also finding exciting opportunities as we see China is moving towards greater consumption of cleaner energy. Alongside the country’s commitment to be carbon neutral by 2060, China has become a leader in the use and manufacture of electric vehicles and solar energy equipment. Electric vehicle sales are expected to grow further on the back of supportive government policies, and increasing demand for environmental-friendly vehicles.

In our portfolio, we look at stocks along the value chain like Yunnan Energy New Material, which make separators that go into electric vehicle batteries. We think that this is an economically interesting area, with rapid growth potential.

Longer-Term Healthcare Demand

Even before the outbreak of Covid-19, China lacked adequately widespread diagnostics and healthcare facilities and had shortages of broad-based vaccinations for illnesses such as the regular flu. As consumer expectations continue to rise, a focus on improving healthcare spending in China remains a clear structural trend for investors, especially in areas like outsourced clinical testing, diagnostics, and vaccinations.

For example, the pandemic has shone a light on under-investment in hospitals where ICU beds represent just 5 percent of hospital beds vs 15 percent+ in developed markets. This provides structural growth for companies such as Shenzhen Mindray which manufactures medical equipment which has been increasingly successful in export markets given the company’s focus on R&D.

When looking at China, investors should continue focusing on the long-term and the inherent growth prospects of this burgeoning economy. In the short-term, we are likely to also see better performance from some pro-cyclical, stimulus-sensitive stocks. While we cannot fully anticipate the long-term impact of the ongoing pandemic on the Chinese economy, as we continue to monitor the situation, we remain confident that the outlook for structural growth in Chinese markets remains appealing for investors focused on the long-term.

Important notes

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