Robeco’s China strategist expects a benign outlook for China’s economy next year and pins his faith in the ambitious objectives of the country’s policymakers over the next five-to-15 years.
“New economy sectors are the growth drivers for China’s future growth and are accounting for a significant and growing portion of MSCI China,” Jie Lu, Robeco’s head of China investments, told a webinar last week.
Comprised of technology stocks driving better industrial productivity or serving consumer demands, they now make up 65% of the MSCI China, according to Lu, whose Chinese offshore equities strategy is split between technology and innovation (43%), consumption upgrade (37%), and structural reform (20%).
New economy sectors are posting strong earnings, with MSCI China third quarter results more resilient than expected, beating estimates by 9% so far, according to Lu.
“Stronger than expected earnings were mainly observed in the consumer, utilities and financial sectors, while real estate and communication services saw downward revisions,” he said.
The MSCI China index is trading at 15.5x forward price-earnings and at 2.2x price-to-book, which although both are above historical average, are “attractive”, in part because the historical average may be underestimated due to the index inclusion of ADRs only in December 2015 and A-shares even more recently in May 2018, which distorts (lower) the pre-inclusion data, according to Lu.
Other asset managers, including Fidelity, see opportunities in financial services, healthcare, technology and premium consumer goods sectors. Others, such as Schroders, have warned that valuations have become expensive.
A-SHARES VARIATION
Robeco is also confident about the prospects for A-shares (traded onshore in Shanghai and Shenzhen), but also highlighted opportunities in the industrial sector as companies upgrade technologies to improve productivity or shift to higher-value manufacturing.
The MSCI China A-share index is trading at 13.5x forward price-earnings – slightly above historical average – and at 2.4x price-to-book, which is below the historical average.
“More significantly, A-shares valuation [by both measures] relative to US equities is close to the historical low level,” said Lu.
“Earnings growth will recover strongly in the first half of 2021 to about 21% [year-on-year],” he said.
Robeco’s A-shares allocation is 37% to consumption upgrade stocks, 25% to beneficiaries of structural reform, 24% to industrial companies modernising and 14% to the technology and innovation sector.
FIVE-YEAR PLAN
Lu’s immediate confidence for China equities is predicated on the country’s economic growth continuing “its recovering track” and hopes for a pick up in global economic activity with the rollout of coronavirus vaccines.
Longer-term, he pointed to China’s 14th five-year plan, which sets a goal of achieving high-income status by 2025, and the country doubling its economic size by 2035. The plan focuses on improving the quality of economic growth, with R&D rising to 3% of GDP by 2025 (the equivalent of the US) and manufacturers moving up the value chain.
A reduction in carbon emissions will give a further boost to China’s $8trn solar and wind energy industries, while policymakers expect the country’s urbanisation rate to reach 70% by 2035.
