China has been actively pursuing a strategic economic transformation in recent years, from one that followed an investment-led and export-oriented model to one that is led by domestic consumption growth and innovation.To fuel this shift, Beijingembarked on reforms to sharpen the competitiveness of its private sector, resulting in China’s corporate landscape to change rapidly. This transformation has accelerated due to the government response to the COVID-19 outbreak and recent geopolitical developments.
According to Chin Ping Chia, Head of China A Investments at Invesco: “China is experiencing a solid economic recovery following the COVID-19 downturn, providing support to Chinese equities and long-term prospects.However, the rapid pace of transformation is quickly introducing new opportunities while exposing more unforeseen risks. Understanding the implications brought about by these shifts is crucial for equity investors, requiring a more forward-looking view.”
Historically, the China A-share market has offered a rich source of alpha based on average active manager performance. However, equity investors have been disappointed by the market’s beta performance, which is largely due to high volatility linked to the large base of retail investors.As China’s economic transformation accelerates and capital market continues to open up, the nature of the beta that China brings may again evolve, and equity investors will be looking for ways to position their portfolios to tap into these shifts.
Invesco has identified three key drivers that will determine the performance of Chinese corporates in the medium-to-long term: demographic trends and the rise of China’s middle class, technological trends and digitization, and reforms to further develop China’s capital markets. Trade tensions, rising protectionism, the unexpected rapid spread of COVID-19 and the changing nature of international relations have increased the urgency with which China relies on its own consumers and technological upgrade to drive growth. China is also keen to develop its capital markets to reduce the reliance on bank-led financing, and to integrate them with global markets to help spur economic growth.
Chin Ping Chia said: “Together with how recent geopolitical developments are unfolding, we believe that some sectors will stand to benefit from these trends, such as technology, healthcare and consumer, while other sectors could see their influence diminish. But, while some sectors could be negatively impacted, some companies in these industries may be better positioned to tap into technological trends to thrive and flourish.”
A cap-weighted allocation to China equities has historically been volatile regardless of the choice of benchmarks. While investor behavior, market microstructure and the closed nature of the capital market have contributed to the volatility, the fast changing nature of the China economy should also be considered, according to Invesco.“Investors positioning for emerging China A-shares opportunities would benefit from being sensitive to the systematic risks present in China by understanding macro transformation and fundamental drivers in economic sectors.A bottom-up approach based on disciplined analysis of company fundamentals remains a key building block in portfolio construction,” cautioned Chin Ping Chia.
Josette Rizk, Client Director, Invesco, Middle East and Africa said: ”China’s ability to contain the COVID-19 outbreak and provide the necessary stimulus has helped the market improve and gather momentum as economic activities start to normalize, which would support Chinese equities. Such unique competitive dynamics of China are appealing to investors in the Middle East, which has driven some of the increases in strategic and tactical allocations to China that we’ve seen.”