As COVID-19 slowly loosens its grip on China, it has become clear that many of the long-term structural trends shaping the markets remain intact or have even accelerated—creating investment opportunities in Hong Kong-China equities.
Chinese authorities have implemented targeted, large-scale monetary and fiscal policy efforts to counterbalance the initial shock from the pandemic, and China’s economy has responded. The country reported economic growth of 3.2% in the second quarter—a strong rebound from the first quarter—and operating capacity across key sectors such as property, automobiles and technology returned to pre-COVID levels. The Hong Kong-China equity markets have followed suit, recovering notably in the last few months. And while pockets of volatility are very likely going forward, and much uncertainty remains around the severity and longevity of the crisis (and the virus itself), we believe the equity market remains supported and will continue to present attractive long-term growth opportunities for investors.
In particular, there are a number of sectors benefitting from supportive long-term trends that have accelerated amid global lockdown conditions—digital infrastructure, e-commerce and healthcare chief among them. In our view, companies that are directly or indirectly exposed to these sectors, and to the underlying trends supporting them, look poised for further growth as the economy recovers.
1. “New” Digital Infrastructure
New digital infrastructure—5G, artificial intelligence, industrial internet and big data centers, for instance—is one area where opportunities have increasingly emerged during the crisis. Specifically, data center operators, which were already on an upward trajectory, have experienced a significant boost from the prolonged work-from-home environment. With a greater amount of content being consumed online, data traffic has increased notably, resulting in a more urgent need for faster computing power. By some estimates, growth in China’s data center market could accelerate by as much as 26% over the next three years—largely a result of the increased demand on the back of COVID.
5G is another area that stands to gain significant momentum over the coming years—and with the launch of 5G commercial services by telecom operators in 2019, China has officially entered the 5G era. Of note, we expect 5G adoption to track materially faster than 4G—by some estimates, 5G-enabled smartphones could account for up to 90% of the smartphone market by 2023, or four years after entering the market. While most 5G models have so far been restricted to premium or high-income segments of the market given the higher cost of components, new models continue to enter the market and will likely account for a growing proportion of new launches in 2020 and 2021.