AXA IM Talk on Asia & China Market: Will Chinese Equities have a bull run in Year of the Ox?

AXA IM’s Senior Emerging Asia Economist, Aidan Yao, shares his latest macro views on China and Asian Market every month.

This month he is joined by William Chuang, Portfolio Manager of Asian Equities. The two of them talk about outlook of China’s equity market in 2021, and some key considerations for investors interested in China.

Please find the full script below:

Aidan: Hello. Welcome to our monthly video series. I’m Aidan Yao, the senior emerging Asia economist here at AXA Investment Managers. First of all, please allow me to wish all our viewer a healthy and prosperous Year of the Ox.

Today I’m very delighted to be joined by colleague William Chuang to discuss his 2021 view on the Chinese equity market. Will, welcome!

Will: Thanks for having me, Aidan.

Aidan: Chinese equities market delivered tremendous performance in 2020 during the pandemic, what in your view has contributed to China’s resilience, and do we expect the bull run to continue in the year of the Ox?

Will:  Indeed. Chinese equities did perform well last year, and the strength was pretty broad-based. 

There were multiple drivers for the strong market last year.  First, Valuation was attractive after the selloff in March. Second, Export received a huge boost as the rest of the world became impacted by the spread of the pandemic. That helped a speedy economic recovery in China. Lastly, there were a lot of positives within the 14th 5-year plan as well as various environmental commitment from the highest level of the government.  We think most of these factors are still in place this year.  

Aidan: Let’s just zoom in on your last point. We know that 2021 is the beginning of China’s 14th FYP, from a macro standpoint, we think the focus will be placed on things like technology innovation, supply-chain upgrade, raising the consumption share in the economy, and decarbonization by 2060. As a long-term investor, where do you see the most exciting opportunities in China’s long-term development plans?

Will: You’ve just hit all the key areas where we see very strong structural growth trends.  Maybe we can touch on two areas that we like quite a bit. 

You mentioned decarbonization 2060 earlier and this is an area that we’ve been heavily invested in.  Having lived and travelled extensively through China, I saw firsthand how bad the pollution got.  There were days where I literally could not see 10 feet ahead of me while walking down the street.

China today is a very difference place. China produces 72% of the world’s solar modules, 69% of lithium batteries, almost half of the world’s wind turbines, and 30-40% of all the electric vehicles.  It has become an extremely credible player in clean technology, and it makes sense that they will need to continue to invest to retain this leadership.           

Another area I find very exciting is in the healthcare sector.  While aging population is a global issue, it is perhaps the most important structural challenge facing China, because China has gone through 4 decades of One Child Policy, and currently has probably the fastest and largest aging population in the world. The elderly population is estimated to peak at close to half a billion people by 2050. Clearly there’s a lot of opportunities here.

Aidan: There seems to be a lot of fundamental support for some of these growth areas. Having said that, some of these stocks have run up a lot in the past 12 months, are you concerned about high valuations associated with some of these sectors and names, as reflecting perhaps markets already front-ran future developments which are arguably still highly uncertain?

Will: In terms of valuation, I think it would be a mistake to generalize the market as a whole.  If we were to strip the top 5 names accounting for almost 30% of the Chinese benchmark, valuation actually looks reasonably in line and within historical range. 

Our experience has taught us that it generally makes more sense to pay up for a great business that can compound over time as opposed to paying cheaply for a mediocre one.        

Aidan: Couldn’t agree more. If we can be a little specific here and focus on the technology sector, which has had a phenomenal run, not just in China, but across the world. The pandemic has certainly sped up the digital transformation – a trend that was already on the way before COVID. At the same time though, valuations of tech companies have reached very stretched levels in some cases, and regulations across the world have started to tighten as well. Do you think the tech-centric market rally will continue?

Will: I think it is inevitable we will see rotations in and out of technology sector, periodically. Our strategy is not to time these rotations as these are dependent on factors entirely out of our control. 

Our approach is to evaluate the underlying drivers and assess whether anything has changed.  From where we stand today, I can offer two points to consider:

  1. The US China trade tension over the past couple of years has exposed a big weakness to China’s development plan.  China’s ability to continue to access leading edge semiconductor chips is crucial for the country to climb up the technology curve and achieve self-sufficiency. So, investments into R&D will continue and import substitution will likely accelerate.
  2. technology stock is a very generic label and covers quite a broad spectrum of companies.  Increasingly, we were finding more opportunities in the enabler of the digital economy.  A perfect example is the cloud computing space where we are seeing a clear shift from private to public cloud.  The public cloud market in China is currently about 1/6 of the size of the US.  So, there is clearly more room for growth.      

Aidan: Will, thanks very much for the interesting discussion. To our viewers, we hope you find this discussion useful. You can find more information on our Chinese equity market views on our HK and SG websites.

Thank you very much and stay safe.