Outlook 2018 - China equities: New China

Outlook 2018 - China equities: New China

‘New China’ sectors, those spanning consumption and service-oriented industries, are likely to benefit the most from consumption upgrades and innovations, and are expected to witness the highest growth in the next three to five years. Those companies with strong technological knowledge and innovative products are particularly likely to do well.

What is your investment outlook for China equities in 2018?

After the remarkable of outperformance in 2017, 2018 could mark another strong year for Chinese equities, supported by stable macroeconomic data, upward earnings revisions and reasonable valuations.

On the macroeconomic front, the Chinese government is shifting its focus from specific growth targets to enhancing the quality of growth and attaining balanced development. As such, China’s economic growth is expected to moderate slightly in the coming years as the economy rebalances away from investment and external demand, towards domestic consumption.

Overall, China’s consumption growth should remain healthy and is likely to continue to outpace GDP growth and investment in 2018, supported by a solid labour market, strong income growth and continuous consumer upgrades.

On the corporate earnings front, Chinese corporates are expected to deliver mid-teen earnings growth in 2018, due to solid macroeconomic growth and a moderate inflationary environment. Ongoing supply-side reforms should boost China’s production efficiency and improve corporate earnings. An uptrend in corporate capital expenditure is also likely to provide firm support. 'New China' sectors, such as internet, e-commerce, consumer and insurance, should continue to witness the highest secular growth. Overall, further upward earnings revisions should continue to support market sentiment.

In terms of valuations, the MSCI China Index is now trading at a 12-month forward price to earnings ratio (P/E) of 14.2x, with mid-teen earnings growth. This appears fair in a historical context and remains reasonable compared to its global and regional peers.

Chart 1: China valuations appear reasonable

Source: Datastream, November 2017

What do you think could most surprise investors next year?

Geopolitical risks remain the primary concern for global investors in 2018. In particular, North Korea’s missile and nuclear programmes are expected to raise tensions in 2018. Moreover, rising protectionism and economic nationalism could dampen global trade and escalate geopolitical tensions in the region.

In addition, the level of Chinese debt has been surging rapidly since the global financial crisis in 2008. Household debt, in particular, has been rising at an alarming rate on the back of rapidly rising mortgage loans and consumer credit.

China’s mounting debt could pose threats to global economic and financial stability. That said, policymakers have taken initial steps to facilitate private-sector deleveraging, and credit growth and corporate debt are increasing more slowly. This could mitigate the threat of China’s debt risk.

On a positive note, Chinese corporate earnings could surprise on the upside, driven by improving product mix and operating efficiency. This could boost investor confidence and lend further support to market performance.

How do you plan to capture the best opportunities and add value for investors?

I follow a fundamental, bottom-up approach to generating long-term capital growth by investing primarily in good growth companies. I believe that growth is the key driver of stock prices and that alpha can be generated by identifying and investing in companies with good growth prospects. I look to identify companies with a strong growth outlook, together with solid working capital, robust cash generation and attractive valuations.

I will continue to focus on stock-picking opportunities with an emphasis on companies that have sustainable growth prospects in the next three to five years. I remain positive on ‘New China’ sectors, particularly on companies that are likely to benefit from consumption upgrades and innovations. I favour companies that have strong technological knowhow and innovative products, as these firms are expected to witness the highest growth in the foreseeable future.

RAYMOND MA is a portfolio manager based in Hong Kong at Fidelity International, and has over 15 years of investment experience. Raymond joined Fidelity in 2006 as an investment analyst covering China telecoms, financials and consumer stocks. Raymond was made the consumer sector leader in 2009, director of research in 2010, and portfolio manager in 2011.

Before joining Fidelity, Raymond was Assistant Director of BNP Paribas Peregrine in Shanghai from 2000 to 2006. Raymond graduated from Fudan University with a Master of Law degree.

 

You may also be interested in

Most stock indices advanced as trade worries subsided

Shares were mixed in lackluster trading Wednesday. The Dow Jones industrials gained 0.6 percent — it climbed to its best closing level since late January. The S&P edged up 0.1 percent while the Nasdaq retreated 0.1 percent. Trading was choppy amid lingering concerns about the trade dispute between the US and China. With the widely anticipated tariff announcements in the past, traders were now focusing on next week's Federal Reserve meeting.

Most share indices advanced even though the US and China enacted tariffs

US stocks, led by gains in consumer discretionary, technology and industrial stocks, rallied as investors shrugged off escalating trade rhetoric between the United States and China and rebounded from Monday’s selloff. The Dow Jones industrials were up 0.7 percent, the S&P gained 0.5 percent and the Nasdaq was 0.8 percent higher.