3 February, 2020
Ronald Chan, Chief Investment Officer Equities, Asia ex-Japan
Concerns about the economic and financial impact of the coronavirus outbreak have seen some offshore Chinese equities come under pressure1. However, Ronald Chan, Chief Investment Officer, Equities, Asia (ex-Japan), believes that if these worries lead to a broad-based correction, then any market decline should be short-lived or contained. While economic uncertainty could also hurt China’s first-quarter manufacturing and GDP numbers, Chan thinks that the government could introduce further policy easing measures to ensure growth stability. As the viral outbreak may improve with warmer weather in the coming spring, investment sentiment should gradually improve. In the meantime, investors should remain focused on the market’s long-term fundamentals.
Worries about the coronavirus have seen global investors become risk-adverse and triggered a selloff in some offshore Chinese equities. However, if we use market performance2 and the experience learnt during the SARS outbreak in 2003 as a reference, we believe that a broad-based correction should be relatively short-lived with a more effective virus containment policy.
In light of a heightened public health precaution and the introduction of provincial travel bans, selective segments, such as hospitality, transportation, and gaming activities are expected to face some shortterm pressure. Meanwhile, on-line consumption activities may benefit.
Uncertainty over the extended Spring Festival holiday period may also cause some disruption to manufacturing production in the first quarter. As such, the Chinese authorities might engage in further policy easing to ensure growth stability.
Nevertheless, if the situation shows signs of containment, then high quality companies with diversified footprints and strong business models should be resilient. These firms could lead the rebound, as consumption demand gradually resumes. Moreover, while a full economic recovery may be delayed, the momentum in the underlying economy, such as the resumption of corporate capital expenditure in the fourth quarter of 2019 should provide a buffer to this unexpected business disruption.
Overall, investors should remain convicted of the view that key secular trends that form the basis of our investment themes are unchanged: online-led consumption upgrade, 5G roll-out beneficiaries, and policy-driven opportunities in medical reform, supply-side reforms, and sustainability topics.
As we mentioned in our 2020 outlook, we think that disposable-income growth across China and the convergence of urban and rural incomes offer unique opportunities for e-commerce platforms and apps.
5G roll-out should be a prominent theme in Greater China equities, especially in China A-shares, as the cell-phone replacement cycle in mainland China is expected to shrink from 24 months to its historical average of 15–16 months. Therefore, investors should be constructive on battery producers, chips, frequency, and antenna-related industries.
Finally, investors should remain focused on policydriven opportunities and we are positive in areas of environmental protection, such as natural gas distribution and some waste-to-energy companies. This stance is based on long-term support from the government.
1 Bloomberg, 24 January 2020 to 30 January 2020: Hong Kong’s Hang Seng Index (in HK dollars) dropped by 5.37%, while MSCI’s China Index (in US dollars) corrected by 4.1%.
2 Financial Times, 28 January 2020: Investors look to history for clues on market impact of coronavirus.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income – Aim for higher, not the highest
If we focus too much on chasing the highest yield and upfront yield generation, we could suffer from early capital depletion and miss the total return opportunity towards the later stages of the investment journey.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
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