Investing in the Chinese recovery

The COVID-19 pandemic has created stock market volatility across the world. But in China, the country that was among the first to successfully control the virus, markets have proved calmer as normal economic activity starts to recover. International investors are therefore looking closely at the world’s second largest economy for potential opportunities in an increasingly uncertain global outlook.

A range of expert investors, speaking across a range of webinars during HSBC’s recent China Conference, shared their expectations for China. They discussed the broad macroeconomic situation, as well as their views on various sectors.

There was widespread agreement among speakers at the conference that China’s economy is on an upward trajectory, though this more apparent on the supply side. One international investor said that the data shows a strong recovery, especially from a manufacturing and production perspective.

That said, they highlighted that the demand recovery is lagging production, as consumer spending is held back by cautious stance adopted by shoppers. Products that consumers consider as non-essential such as tourism and luxury goods will be particularly slow to recover. The shortfall in domestic demand could be made up for by demand from overseas, but that depends on the health of the global economy, they said.

The problem with external demand is that not only are many developed economies still dealing with COVID-19, there are growing tensions between China and a number of its major trading partners, which renew concerns from last year that the trade war with the US could cause economic fallout. “The relationship between China, not just with the US but also other industrialised countries, is at a bit of a low,” said Bill Maldonado, Global Chief Investment Officer, Equities and CIO Asia-Pacific, HSBC Global Asset Management.

On the domestic front, the focus is on Beijing’s policy response to the downturn, and whether it will resemble the huge infrastructure push that was launched to counteract the impact of the Global Financial Crisis, or whether it will take a different approach to the economic impact of the pandemic.

There are already signs that the Chinese government is thinking about the economic recovery in new terms, and there is potential for metrics other than growth to come to the forefront. This shift in emphasis was evident at the National People’s Congress, where the government gave up on its GDP growth target for 2020.

“What happens if the global economy remains weak? That is going to be a drag on the Chinese economy,” said Mr. Maldonado. “Not so much because net exports are a big contributor to GDP, but the manufacturing that China does provides many jobs. And if that begins to decline, for the first time in a long-time, China is worried about the employment picture.”

Moving from an economic perspective to a more sectoral approach, investors speaking at the China Conference highlighted how different industries will be affected by the pandemic. They discussed how there could be a long-term change in how we live our lives, especially as technology companies have received a significant boost in 2020. Productivity apps for example, help workers collaborate remotely. Shopping for day-to-day necessities is even more popular than before. And indoor pursuits like online games become more in focus as traditional sporting events get cancelled.

But at the same time, China’s technology sector has already been an investor favourite for several years, which raises fears that tech stocks could be more expensive than is justified by the fundamentals.

The challenge for investors then is to find the technology companies that are seeing more than just a short-term pick-up due to temporary conditions related to the pandemic. One investor panellist said that they were looking for opportunities on the tech businesses that are involved in long-term trends that will play out over the coming. In particular, they singled out companies providing 5G infrastructure and companies working on semiconductors.

Another sector where there are concerns over the potential for stretched valuations is consumer goods. As with the technology sector, investors are differentiating between the different consumer subsectors. Investor panellists said that in the short-term companies selling personal and household goods, will likely enjoy a V-shaped recovery. Cinemas, travel businesses, and other companies that involve having people in close contact will see have a more L-shaped future.