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What are the investible themes in China?

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This is a sponsored article from J.P. Morgan Asset Management

The global economic recovery is continuing and North Asia has emerged as a key focus for some investors seeking growth. China, with economic growth projected at 2% in 2020 and 7.9% in 20212, takes the spotlight with relatively attractive long-term investment themes in its equity markets.

Growing domestic demand, import substitution and technological advances are likely the key considerations for investors seeking to optimise China’s potential in their growth portfolio. We share our views on some investible themes for 2021 in China’s equity markets.

3 investible themes in China’s market1

The global public health crisis has accelerated some structural trends in China, including domestic technological development, healthcare innovation and consumption upgrade. Such long-term trends are likely to take hold as recovery broadens in domestic demand. Additionally, the Chinese government is also continuing to promote coordinated pro-growth policies while deepening reform measures that support these trends.

1. Tech in everyday life1

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

Software application:
The trend towards digitalisation has accelerated the commercial-and home-use of software. Cybersecurity, for example, currently accounts for a relatively small portion of Chinese corporate spending, but could gradually take up a larger share in the overall tech spend.

Semiconductor manufacturing:
China is building a domestic tech industry, particularly in semiconductors where previously, it had primarily been an importer. In addition, the deployment of 5G has also driven market demand for semiconductors.

Clean energy application:
China is moving towards greater consumption of cleaner energy, and 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.

2. Longer-term healthcare demand1

One of the structural changes arising from the crisis is increased demand for healthcare services and products, including healthcare infrastructure, preventive treatment and vaccine development. China’s healthcare industry covers a considerable number of sectors, and spending on such services could continue to grow. We believe three macro trends are relatively attractive:

Research & development (R&D) outsourcing:
Contract research and contract manufacturing organisations could benefit from rising demand for R&D outsourcing globally.

Medical equipment manufacturing:
Another trend accelerated by the global health crisis is increased spending on quality medical services and products, especially by the growing middle class in China. Against this backdrop, this could benefit hospitals and medical equipment suppliers.

Pharmaceutical R&D:
Innovative pharmaceuticals and diagnostics-related corporates could also benefit from China’s long-term investment in R&D. The return of Chinese talent from overseas is helping to fuel innovation in pharmaceutical R&D, alongside the creation of more pharma companies. This could boost scientific R&D in the domestic market.

3. Better living standards and ‘premiumisation’1

As household income increases and the standard of living improves in China, its middle class is increasingly focused on lifestyle upgrades in both daily necessities and entertainment. Alongside supportive domestic policies, consumption is expected to become a key driver of economic growth.

Wealth accumulation and the 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 ‘premiumisation’ is gradually driving growth.

Online entertainment:
Chinese consumers across generations are increasingly shifting to online entertainment services, aided by higher adoption 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.

Offline consumption:
Changing mobility patterns globally have driven increased interest in travel within China. Cross-provincial tourism is regaining momentum, and this could bolster offline consumption, benefitting the tourism-related industries. 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.

Capturing robust opportunities in Chinese equities with a professional team

China has entered a new economic cycle with opportunities evolving from several long-term structural growth trends. China’s onshore equity markets offer a wider set of opportunities including more innovative ideas as compared with the offshore market. Nonetheless, this would also mean a prudent approach is needed to capture quality opportunities.

Leveraging our on-the-ground research which focuses on company fundamentals, our investment professionals integrate bottom-up stock selection with structural themes, seeking to capture opportunities with long-term growth potential.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.
Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

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. Source: “China Economic Update – December 2020”, The World Bank, 23.12.2020.
3. Source: Bernstein analysis, China Association of Automobile Manufacturers, Morgan Stanley, company data, J.P. Morgan Asset Management. Data as of end-May 2019.
4. Source: PWC, Frost & Sullivan, company data, J.P. Morgan Asset Management. Data as of end-May 2019.
5. Source: The World Bank, HSBC, company data, J.P. Morgan Asset Management. Data as of end-May 2019.
6. Source: “China Entertainment & Media Outlook 2019-2023”, PWC, May 2019.
7. Source: “Hainan to raise duty-free shopping quota to 100,000 yuan”, Xinhua, 30.06.2020.
8. Source: J.P. Morgan Asset Management, as of 30.11.2020.

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore and the Securities and Futures Commission in Hong Kong. Investments are not comparable or similar to deposits. Investment involves risk, value of investments may rise or fall including loss of any or all of the amount invested. Not all investment ideas are suitable for all investors. Past performance is not indicative of current or future performance. Diversification does not guarantee positive returns or eliminate risk of loss. Investors should make their own evaluation or seek independent advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not be taken as or constructed as research or investment advice. Issued in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K) and in Hong Kong by JPMorgan Funds (Asia) Limited. All rights reserved.

This is a sponsored article from J.P. Morgan Asset Management

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