As global markets grapple with the impact of the coronavirus pandemic, investors worldwide are seeing downward earnings revisions and closely watching for signs of resurgent growth. They don’t have to dig too deep for those signs in China, where a number of economic and market fundamentals have lifted the country toward recovery more rapidly than many expected, and which continue to underpin long-term share price performance, according to Wenchang Ma, portfolio manager at Ninety One in Hong Kong.
“China’s equity market has held on better than the rest of the world, probably better than what many people, including ourselves, expected initially,” said Ma, a veteran China active equity manager. “China was the first in, first out to experience the pandemic. The government took decisive measures with the lockdown and centralized resources to help areas most in need. They were able to maintain discipline in social distancing, and all that helped lift China out of the crisis as fast as possible,” she said. Chinese equities have seen some downward revisions, she said, but earnings adjustments are already under way in addition to a number of sustainable drivers of alpha for the long-term China equity institutional investor.
LOOK BEYOND THE RHETORIC
The geopolitical rhetoric between the U.S. and China, which is as high as it’s ever been, and the potential of a second pandemic shock are still risks that investors need to watch for, Ma said. But the Chinese government is using both strong fiscal policy and prudent monetary policy to continue its economic recovery, and its support of market reforms continues to be consistent. Chinese fiscal policy is leading the economic recovery effort by increasing infrastructure spending and, at the same time, encouraging consumption with tax and fee cuts, she said.
The transformation of China from a more export- and manufacturing-driven economy to one that is more services and consumption-driven continues as well, and the pace of these developments has helped in the recovery. In fact, since China’s exposure to consumption-driven activity is a bit lower as a total proportion of its economy, when compared with many developed economies, China’s economic recovery has actually been slightly faster, Ma said. Several sectors are looking up: “Production levels are close to normal. It’s the same with coal and electricity,” she said. Service sectors like auto sales are already back to last year’s level. Home sales are very resilient. Traffic size in major cities is back to normal levels. Traffic is still lower across cities, and the most impacted has been international travel.”
“We are quite pleased with the way that our China strategies have performed through the crisis,” said George Varino, managing director and head of U.S. institutional at Ninety One. “In many ways, [performance] has justified the allocations that have taken place already. It speaks to the diversification benefits for the past few years as A-shares were included in the MSCI” indexes, he said.
“Most investors we speak to are looking for the downside protection that China provided in the first quarter,” he said, “certainly compared to the rest of emerging markets and developed markets.” As MSCI includes more A-shares in its indexes over time, he said he expects China to become a more segmented allocation for institutional investors. The ease of access to A-shares through Stock Connect and a strong fund pipeline will draw global investor interest in China, including from the U.S., which has lagged thus far versus the rest of the world, he added.
