Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 403

Five trends shaping investments in China: 2021 and beyond

Given its size and influence, China remains a key investment destination despite ongoing trade disputes and diplomatic tensions with the US and Australia. With a GDP equivalent to around 70% of the United States, many global portfolios continue to feature Chinese equities.

Here are five insights into the current and future trends shaping the Chinese economy.

1. 2021 will see a strengthening economy in China

This year will provide an opportunity for more balanced market growth, perhaps including cyclical stocks and shares whose value took a hit last year. As the economy recovers, shares in a wider range of sectors will become more attractive. Last year, just a handful of companies accounted for the majority of the returns. We have already started to see signs of change, hence why we expect this year to be different from the last.

2020 was slightly unusual in that investors were very confident in the market despite the high valuations. As companies whose prices have increased 80- to 100-fold release their earnings, it will be interesting to see if they are able to meet expectations. We do not necessarily expect share prices to fall but believe returns may be lower than last year. As such, we will be conservative when deciding which stocks to purchase.

2. Equities are more attractively priced than bonds

Despite the expected economic recovery this year, no one is predicting higher interest rates, unlike in previous recoveries. This is because the economy is still in a precarious situation. Compared to bonds, we believe equities still offer better value for money. For example, the yield from a CK Hutchison Holdings bond (a global conglomerate) is around 1.6%-1.7%, but the dividend yield is more than 5%.

3. Chinese manufacturing and technology is more competitive than ever

The days of China being a cheap source of labour are gone but at the same time, the salary of a well-qualified Chinese engineer may be just one-half or two-thirds of the salary of a US-based engineer.

As a result, some sectors of the Chinese economy have started to grow quite rapidly, such as pharmaceuticals, software, semiconductors, and the automotive industry. China has been upgrading its manufacturing industry – a key aim of President Xi’s latest and previous Five-Year Plans – which has benefited companies like telecoms equipment manufacturer Huawei.

On a similar note, almost 600,000 Chinese graduates return from overseas universities each year, boosting China’s technological capacity. The R&D expenditure of Chinese tech companies has increased and it will be interesting to see the growth opportunities that result.

Our China tech investments are not restricted to internet companies. We expect to see new technologies in other sectors, such as retail and food, to cut costs and increase efficiency. In the future, the tech sector will become much broader as a result.

4. Trade sanctions may actually boost China’s economy

There are historical precedents for the current political climate: in the 1980s the US levied high tariffs on Japanese car imports in a bid to protect its own home-grown car manufacturers.

The US is again in a political and economic wrestling match with its biggest rival – which was once Japan and is now China. As a result, we expect to see more policies from the US designed to limit China’s economic rise.

However, the impact of trade sanctions on the Japanese economy were positive in some respects. Toyota, for example, remains the world's largest car manufacturer and even produces cars in the US. Toyota used local resources to support its global expansion and maintained its status as an industry leader.

We believe that in the short term, the Chinese government will support the economy through measures such as personal income tax cuts and private enterprise financing support. In the medium-to-long term, Chinese companies will be forced to strengthen their core competencies – those that are able to adapt to the new norm should emerge stronger over time, despite trade sanctions.

5. Chinese consumers will increasingly look for home-grown products

In China’s latest Five-Year Plan, the government announced plans to reduce the country’s vulnerability to, and dependence on, the global economy; achieve self-sufficiency; and boost domestic consumption. The government has also introduced subsidies to boost purchases of home appliances and cars.

We see these trends continuing over the next 5 to 10 years. As the Chinese economy develops and incomes rise, people will start to think about how they can improve their quality of life. We believe consumer spending, education and tourism are all poised for significant growth.

Related to this is the increasing popularity of domestic brands. As the younger generations see their living standards and incomes improve, they will start to become more confident about Chinese brands. You can see this in the success of domestic sportswear brands such as Li-Ning and Anta, or cosmetic brands such as Marubi and Pechoin. We predict this trend will continue – and there will be more home-grown brands such as Huawei or Xiaomi to help underpin a local consumer economy.

Conclusion

As President Xi rolls out the latest Five-Year Plan, we expect to see a number of secular trends take hold, which should help the Chinese economy maintain its growth. With an attractive base and a competitive, well-educated workforce, China’s manufacturing champions should continue to advance its technology prowess and gain global market share. At the same time, China’s population is looking inwards for local products and services, helping the country become more self-sufficient. Companies that can tap into these trends will be well-placed to ride the China wave into the next decade.

 

Martin Lau is a Managing Partner at FSSA Investment Managers, based in Hong Kong. FSSA is part of First Sentier Investors, which is a sponsor of Firstlinks. This article is intended for general information only.

For more articles and papers from First Sentier Investors, please click here.

 


 

Leave a Comment:

     

RELATED ARTICLES

Is China’s regulatory reform stifling ‘animal spirits’?

China’s new model is a plan for a hostile world

Debt is the biggest risk on China’s horizon

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.