Hong Kong China Equities: A Positive Outlook, but Headwinds Remain
Chinese equities ended 2020 on a positive note, following another quarter of strong performance in which the market continued to achieve new highs. To-date, Chinese equity markets have fully recovered from the troughs of COVID-19, helped by a resilient domestic economy and the expansion from production to consumption and services in the second half of the year. Positive news around the vaccines also played a role in buoying markets, as did the conclusion of the U.S. presidential election, which helped mitigate near-term geopolitical risks and reinforce investor sentiment.
Going into 2021, policy is expected to remain supportive in an effort to secure the economic recovery in China, although we will likely see a reduction in magnitude and strength compared with last year. The annual Central Economic Work Conference, which concluded in December, has maintained its supportive macro policy direction in 2021, including more effective and targeted fiscal measures, as well as reasonable and prudent monetary policies. The conference also highlighted key structural reforms including the continuation of economic transformation toward higher-quality and sustainable growth, self-sufficiency in the supply chain and scientific and technological innovations. We expect these policy directions to bring strong support to the economy, and subsequently improve market sentiment in areas such as new infrastructure, domestic consumption, new energy, health care and technology localization. Improving market access and promoting fair competition are other notable policy focuses of the government, which should also provide tailwinds to Chinese enterprises in the longer run amid a healthy and improving business environment.
A number of external conditions remain supportive of a global recovery, ranging from a weaker U.S. dollar and an accelerating global demand recovery following COVID vaccinations, to a potentially more predictable trade environment as a result of Biden’s presidency. These conditions, alongside the robust economic revival in China, should allow the earnings growth outlook for Chinese companies to remain positive in 2021, especially for those that are well-positioned to benefit from secular structural growth trends and policy support.
That said, there are also a number of uncertainties and potential headwinds that could increase market volatility in the near-term, particularly the progression of COVID cases and ongoing China-U.S. tensions. While the vaccine likely signifies light at the end of the tunnel, the timeline for its rollout in different countries, as well as the efficacy of herd immunity after inoculations, are crucial and could influence the pace of global economic recoveries in 2021. China-U.S. frictions, on the other hand, will likely continue and create a challenging environment for China in the near term. Recent conflicts between the two countries have diverted from trade to technology and intellectual property, resulting in short-term market fluctuations—but all eyes are on the Biden administration’s next steps, as they could ultimately determine the magnitude of real economic impact on China.
In the medium to longer term, we remain constructive on Chinese equities from a fundamental, bottom-up perspective, and continue to find opportunities in quality companies that look well-positioned to benefit from ongoing urbanization, productivity innovation and consumption upgrade trends. As income growth continues—and demand for higher-quality goods and services rises in China—we remain constructive on leading domestic businesses with strong brand and pricing power, as well as on companies that look poised to capture market share and benefit from industry consolidation.
