- China is entering a new economic normal as it is embarking on lower but more sustainable growth, on the road to recovery from the once-in-a-century health crisis. Moving in line with China’s long-term structural shift potentially towards quality growth, investors are increasingly honing in on quality companies and stocks.
- Rebecca Jiang, co-portfolio manager of our China A-Share Strategy1 shares her views on how the Strategy is positioned for the likely bright spots in the A-Share market.
Q1. The once-in-a-century health crisis is gradually under control in China. Some new economy stocks thrive under this backdrop. Is this sustainable?
- When we view the public health situation in China and the investment implications, we categorise some economic activities as temporary, and others as more structural and long-lasting. There are a few areas where we believe the public health emergency has magnified the structural impact supporting sustainable growth.
- In healthcare, there are a few areas that have benefitted or will benefit from the structural changes arising from the crisis. There is under-investment in healthcare infrastructure, and this is not only in China but also globally. Intensive care capacity, for example, could be an aspect China may need to progressively increase.
- Another area in healthcare is preventive treatment and vaccine development. Currently, there might be a small portion of China’s population that has received vaccines. Nonetheless, the current crisis has sparked near-term demand, and could help increase market penetration of various healthcare-related services and products over the long run.
- Already, there are profound changes related to consumer and corporate behaviours. A large number of consumers are shopping, studying online, and working from home. Such changes in behaviours have accelerated demand for technology, including cloud connect, server and memory storage services, as well as enhanced awareness of network security. Technology is one area that the Chinese government has identified for new infrastructure spending and support. These are structural transformations that could last even as the health crisis subsides in the future.
Q2. In terms of China’s policy support for tackling the health crisis, what are your views on this?
- Economic activity is recovering steadily and industrial production is becoming normalised. On the demand side, consumption seems to have shown obvious recovery in May and June.
- We believe China will continue to pursue better quality growth and this has been the predominant theme for the past 4-5 years, with an emphasis on quality not quantity.
- In terms of policies, fiscal measures, including infrastructure investment, fiscal subsidies, and tax or fee reductions for enterprises, are still the major tools of the government. The Chinese government’s countercyclical economic policies are relatively more measured in both size and scope – targeting the real economy without significantly increasing leverage risks for the financial system.
Q3. After the recent rally in the A-Share market, there are renewed concerns of a 2015-style quick expansion-burst cycle. What are your views?
- In a nutshell, the rally this time is different from 2015, and in our current view, a boom and bust scenario may not be highly likely. First of all, the macro conditions now versus 2015 are very different, especially in terms of the liquidity environment. Globally, central banks are adopting monetary easing, whereas in 2015, it was a monetary tightening cycle in China and the US. Market behaviours too are quite different now versus 2015, in terms of leverage levels. Market participants have been seen to have changed from retail to institutional due to the opening up of capital markets.
Q4. How is your Strategy positioned for opportunities3,4?
- The A-Share market’s diverse sector composition allows our Strategy to capture long-term growth opportunities which would be found in sectors with diverse “New China” opportunities. Supported by 20 dedicated professionals5 in our Greater China Team, we harness on-the-ground research and employ bottom-up stock selection within the 260 China A-shares in the coverage universe.
- In the expected aftermath of the once-in-a-century health crisis, we believe certain Chinese sectors would be well-placed to leverage from the growth opportunities arising from the structural transformation, namely, consumption, healthcare and technology. The public health emergency has also magnified some of the trends in the sectors. At the same time, the potential re-escalating relationships between China and some of its trading partners have accelerated demand for import substitution.
- Technology. Demand for corporate software and cloud application services has increased amid a push among corporates for higher efficiency. The adoption of 5G is bolstering market demand for technology hardware, as well as cloud computing equipment and semiconductors. Widespread digital adoption is opening up potential opportunities for software development and data centres. Mandatory home quarantine and social distancing measures have spurred demand for technology, and renewed interest in cybersecurity and development.
- Healthcare. Research and development outsourcing is becoming more competitive versus manufacturing and development. Pharmaceutical innovation and investment are becoming viable for the long term. The rise in healthcare spending bodes well for hospitals and the medical equipment sector. Moreover, the public health crisis has bolstered demand for vaccines, consultation and treatment, testing services and other related products.
- Consumption. In the consumer space, the over-riding theme is consumption upgrade and this may not be likely to be derailed by the health crisis or any slowdown in macroeconomic activity. In the packaged frozen food sector, for example, the demand is rising with busier lifestyles. With mandatory home quarantine and social distancing measures, more Chinese consumers have turned to home-cooking instead of eating-out, boosting demand for food ingredients.
1 Source: J.P. Morgan Asset Management. Data as of 31.05.2020. For illustrative purposes only.
2 The opinions and views expressed here are those held by the investment team at the date of publication which are subject to change and are not to be taken as or construed as investment advice.
Q5. What is your outlook on navigating current geopolitical uncertainties, such as the US-China relationship?
- It is difficult to predict whether the uncertainties will gradually ease after the US elections or what the next steps are. We’re seeing a likely decoupling with the US in the technology space, and within China, there are import substitution opportunities. Similarly with consumption.
Amid challenging market conditions, strong and well‐managed companies would be in a better position to navigate the challenges and gain market share. We believe the strong will become even stronger. Backed by robust research and an experienced investment team, we continue to focus on growth to capture potential upside opportunities and quality to help mitigate some downside risks6.
This represents investment team’s views as of 28 July 2020 based on current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment or research recommendation.
1 For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2 Past performance is not a reliable indicator of current and future results.
3 Dividends are not guaranteed. The manager seeks to achieve its stated objectives there is no guarantee they will be met.
4 Holdings, exposures and allocations for actively managed portfolios are subject to change from time to time. These represents the investment team’s views under current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment advice. Diversification does not guarantee investment return and does not eliminate the risk of loss.
5 There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management (JPMAM) will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.
6 Risk management does not imply elimination of risks.
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