While global markets faced a challenging year in 2020, China was the best performing market globally in 2020. The MSCI China A shares and the MSCI China indices returned nearly +43% and +27% respectively. The country’s swift handling of COVID-19 and government actions to contain the virus provided a market boost, with careful policy calibration and pent-up demand for consumption leading to the strong V-shaped economic recovery.
Josette Rizk, Client Director, Invesco, Middle East and Africa, said: “China as an economy is of interest to sovereigns and institutional investors in the Middle East. As a major part of the global economy and a significant contributor to global GDP, investors look to China as a long-term play. Just as institutional investors have allocations to the US and Europe as part of a diversified portfolio, these investors have made allocations to China.” Invesco’s sovereign investor survey shows that 88% of Middle East sovereigns have exposure to China, with allocations across the spectrum of asset classes.
The continued rising interest in China is reflected in the growing universe of attractive investment opportunities. China’s onshore A-share market saw about US$150 billion-worth of inflows from international investors through its HK Stock Connect program from January to November 2020. Investors flocked to Chinese stocks in search of certainty and growth, according to Invesco.
Rizk commented: “Though institutional investors in the region tend to access the China through the offshore market because of familiar international standards, China’s onshore market itself is developing and rapidly gaining interest. Institutional investors are taking advantage of market dislocation to generate alpha by allocating to active manager and evaluating the companies that will benefit from China’s growth story.”
Mike Shiao, Chief Investment Officer, Asia ex Japan at Invesco, shares his outlook on Chinese equities in particular: “Chinese equities are doing exceptionally well against the backdrop of 2020’s global market volatility. Government actions have contained the virus and led to a strong recovery. We believe Chinese equities will have another fruitful year in 2021, supported by higher visibility surrounding the growth outlook and by an increase in allocations to the asset class.”
The Chinese economy recovered somewhat after a sharp deceleration in early 2020 due to the COVID-19 outbreak. Real GDP for China expanded 6.5% year-over-year in December 2020, making it one of the only major economies that delivered growth in 2020. “We expect the growth recovery to extend throughout 2021 as economic activities recover from a low base, with consumption playing a key role in driving growth,” said Shiao.
It was in August 2020 that retail sales growth returned to positive territory, after a difficult first seven months. With the COVID-19 situation now under control, Chinese consumers are expected to re-engage in offline activities that have been badly affected by the pandemic. Support by regional governments will help by promoting consumption via policy initiatives such as the travel bubble that was established between Hong Kong and Singapore. Structural drivers are also expected to fuel consumption growth including digitalization, premiumization, urbanization, experience-seeking and wellness which will in turnhelp stimulate shopping, dining, and travelling.
The policy environment will also play into China’s growth outlook, according to Invesco. The country is scheduled to publish its 2021-2025 five-year plan which will feature the new economic strategy of “dual circulation”, intended to boost domestic consumption (domestic circulation) while promoting external trade and investment (international circulation). “We expect China to be focused on stabilizing its growth under this strategy,” commented Shiao.
The Chinese equity market is now the second largest market in the world with more than 5,500 Chinese companies listed across mainland China, Hong Kong and the US, providing a large selection of investment opportunities mostly in structural growth areas such as the internet, consumer and healthcare sectors.
A strong focus on achieving fast growth and high standard of living often means that ESG developments are left behind. However, China has made the ambitious commitment to reach carbon neutrality by 2060, exemplifying its desire to pursue long-term sustainable growth and accelerate ESG development. Shiao expects a strengthening of regulations to drive further improvements in ESG disclosures among Chinese companies. The China Securities Regulatory Commission (CSRC) is expected to publish guidelines for mandatory corporate disclosure on ESG issues by the end of the year. “This will enhance reporting practices and improve the ESG data,” he said. Global investors are placing a greater emphasis on ESG issues and will stimulate ESG development, particularly as the financial liberalization of the domestic market grows.