While some global investors are turning their backs on China due to the regulatory crackdown on private education, property, crypto currency, internet gaming, and are arguing that China is no longer an investable market, DBS begs to differ.
“We are saying ‘do not write off China’,”DBS chief investment officer Hou Wey Fook told a webinar.
There have been 30%-to-40% plunges in the Chinese stock market every few years during other periods of heightened Sino-US trade tensions and domestic fiscal and monetary tightening, he pointed out.
“But very quickly afterwards, the market recovered and bounced back to new highs,” he said. “After all, Chinese long-term fundamentals have not changed, and we continue to see 6% annual economic growth going forward.”
Hou believes that the likely debt default by Chinese real estate developer Evergrande will be manageable. “It is localized, and it will not trigger contagion across world markets as Lehman’s collapse did,” he said.
Hou’s optimism extends to accepting Beijing’s line that China is now prioritising the approach of “common prosperity”. The country is embracing the “S” or the social aspect of ESG criteria that has become increasingly mainstream in the world of investing, he believes.
In contrast to the US, where just a few companies dominate the areas of cloud computing, e-commerce, and online advertising, China is to moving away from a too high dependence on behemoth institutions, he said.
Safe traditional sectors
Nevertheless, this shift has triggered a massive sell-off in Chinese technology and ecommerce shares. On the surface it appears “very tempting to bottom fish at these bargain levels”, but DBS wants to see more clarity in respect to the government’s regulatory map before adding exposure to the sectors.
Meanwhile, DBS likes Chinese banks and A-shares, which are “sectors that are not impacted by the regulatory changes”.
Chinese large banks are delivering 5%-to-6% dividend yields, which should be sustainable for the long run, given the conservative pay-out ratio of 30% versus regional or global banks at more than 50%, according to Hou.
He also favours the Shanghai A-share market, which comprise traditional companies that benefit on the long-term positive fundamentals of the Chinese economy.
“This is demonstrated in the resilience of the China A-share market when compared with other indices, such as the Hang Seng China Enterprises Index which has a high representation of technology and internet stock.”
In addition, DBS sees there is a race towards technology self-sufficiency.
“It is clear the Sino-US trade war is not about how many physical goods one side exports or imports. Instead, the two countries are competing on who has the edge in artificial intelligence, data, block chain, cloud computing, 5G and semiconductors,” said Hou.
The pandemic has exposed national strategic vulnerabilities from disruptions in the global supply chain, especially for integrated circuit (IC) chips, batteries, and medical supplies.
As a result, governments will be spurred towards multiyear capex expansion on technology, which will benefit IC design and manufacturing, and semiconductor equipment companies, according to Hou.
