Opportunity knocks with Chinese shares
China’s new economy sectors are forecast to rebound from the short-term sell-off and continue to do relatively well.
The new coronavirus has spooked governments and markets. People are taking various measures to protect themselves both personally from the deadly virus, and financially from market swings.
While Chinese shares have been volatile, this could be seen as an opportunity for investors to buy up and diversify their portfolios into the world’s quickest growing major economy.
Driven by fears of the new coronavirus outbreak, equity markets have been volatile in the past few weeks, especially in Asia. The benchmark CSI 300 Index is down 4.8 per cent over the year to 10 February, compared to a gain of 3.0 per cent for the S&P 500 and 4.6 per cent for the S&P/ASX 200.
However, this sell-off in China could be an overreaction. It’s worth taking a look at previous outbreaks such as SARS (severe acute respiratory syndrome) in 2003 to understand the behaviours of markets and understand what might happen next.
It is estimated the SARS outbreak knocked 1 per cent from China’s growth rate in 2003. Whether we will see such an impact in 2020 only time will tell.
But we do know that the Chinese government has moved quickly to shore up its economy, announcing new policies to ensure liquidity, strengthening credit support and relieving the debt burden for troubled corporations and institutions.
This policy reaction is similar to what happened when in 2003 with the government moving to stimulate economic activity. Economists have shaved a few points off Chinese economic growth forecasts for 2020, but most still expect the economy to expand more than 5 per cent, compared to just over 2 per cent in Australia and the US.
Overall, we expect markets and economies to recover but some sectors will be harder hit than others. Of the four sectors we label “new economy” in China, namely: technology, healthcare and the consumer staples and discretionary sectors; technology could be the most adversely affected by the slowdown associated with the coronavirus as global supply chains shift.
This could impact some of China’s largest exports including smartphones, computers, tablets and overall consumer electronics.
However, the government’s investment in the high value-add tail of the technology supply chain has been accelerating through 2019 and will continue in 2020.
China’s domestic spending on research and development grew from US$9 billion in 2000 to US$293 billion last year, now the second highest total R&D spending in the world behind only the US.
We expect the government to continue its R&D spend to make China’s technology sector stronger. We believe this will support the recovery of technology shares.
Some analysts even suggest stocks like healthcare and those that rely on indoor consumption could be boosted. Healthcare companies will likely see elevated demand for oxygen therapies and antibiotic agents. Chinese households were already devoting 7 per cent of total discretionary spending to healthcare.
But the biggest spender in the healthcare space will continue to be the government, as we have seen with the hospital being built in Wuhan in under two weeks.
China's 'new' economy will rebound
While the coronavirus outbreak is an unfortunate and globally concerning event, we believe China’s new economy sectors will rebound from the short-term sell-off and continue to do relatively well.
We would encourage investors to adopt well diversified portfolios so they are exposed to different sectors, countries and economic cycles.
Perspective is always important in investing and while panic is understandable, it’s important not to act on it, but take advantage of the opportunities, and this is what we believe Chinese equities represent.
Price-earnings ratios for Chinese A-shares have dipped this year because of the coronavirus, representing a potential buying opportunity for investors. Earnings expectations remain robust and are relatively stable after ang upswing in 2017.
We believe China’s share market to be one of the greatest potential sources of investment returns over the medium to long term and it also offers much greater diversity than the Australian market and therefore can play an important role in diversifying investors’ portfolios.