Global equities, and particularly Asia-Pacific markets, have been volatile on the back of coronavirus. Consensus is for a significant impact to Chinese GDP in the 1st quarter of 2020. However with the Chinese government choosing to use easing and fiscal policy to support broad economic growth this might be a great opportunity in Chinese equities. In our view investors should consider the opportunity for Chinese equities in 2020.
From a domestic markets perspective, China’s central bank has announced a firm timetable for opening its futures, brokerage and mutual funds sectors fully to foreign investors in 2020. Financial sector openness alleviates financial constraints while additional liquidity and capital could further buoy equity prices.
China’s economy relies heavily on its real estate sector that accounts for approximately 20-30% of its GDP. The government plays an intricate role in balancing debt and house prices, attempting to smooth real estate inflation and curb speculation. However, if the government is reluctant to push easing policies given concerns about real estate prices, it may be impossible to hit its 6% official growth target. Our view is that more stimulus will be needed and targeted to the broad economy helping Chinese equities.
An easing cycle could prompt a strong rotation of capital to equities in China. Combined with signing of the US-China trade deal phase one and continued global growth this could present an opportunity in Chinese equities in 2020. Perhaps now is the time to look through the coronavirus issue and to the returns that may be possible as this concern passes.
A broader exposure can be obtained through ETFs such as the MSCI China Index that captures a large and mid-cap representation across China A-shares, H-shares, B-shares, red chips, P-Chips and foreign listings1.
End notes 1. China MSCI ETF - https://www.msci.com/documents/10199/e67c4c7b-b016-4e59-a460-b42574cde2e6