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Investment views

Five investment themes for the Year of the Rat

22 January 2020
Authors: Wilfred WeePortfolio Manager, Joanna YangAssistant Portfolio Manager

 

Quick, smart: what might the Year of the Rat hold for investors in China?

Chinese New Year arrives on 25 January, ushering in the year of the intelligent and agile rat. What should investors expect? Our China experts suggest that the rodent — which came first among all the animals in the zodiac race thanks to its quick wits and cunning — may prove an apt symbol for the next 12 months. Here’s why:

Stronger foundations for growth

The latest economic data has been encouraging, with a slight rise in infrastructure spending, and China’s services sector and consumption have both shown resilience. Industrial production data has also beaten expectations. Other recent upbeat news includes the approval of local-government special bond issuance (earmarked for infrastructure investment), which has the potential to support economic growth.

Meanwhile, China’s monetary policy moves have continued to bolster the economy, while remaining targeted in design and prudent in magnitude. The recent cut in the reserve requirement ratio for financial institutions’ deposits provides further evidence of policymakers’ desire to create favourable conditions for growth.

Nothing is stagnant in China, which has been ramping up efforts to reform its economy and businesses. This includes the following:

  • Transformational reforms are taking place among China’s state-owned enterprises (SOEs), a topic we wrote about recently. From an equities perspective, our 4Factor team considered five questions for investors in China’s SOEs.
  • China is taking bold steps to open more sectors to private enterprises, encourage innovation and improve legal protection.
  • Some of the country’s biggest cities are relaxing the residency permit system, known as the hukou, which determines where people can live and work. The reforms will reduce restrictions on the mobility of China’s immigrant workforce, thereby releasing a structural source of demand for housing, medical and educational infrastructure, and services. The reforms are part of the transformation of China’s rural economy, which will be a key driver of the rebalancing of the nation’s growth.
  • Importantly for investors, China is moving fast in opening its capital markets to foreign investors. Investment quotas for QFII (Qualified Foreign Institutional Investor) and RQFII (Renminbi QFI) investors have been removed and access channels are being harmonised.

Greater currency stability

The renminbi looks set for a smoother journey this year, given the US-China truce. It could also benefit from a weakening US dollar, relating to uncertainty ahead of this year’s US presidential elections. A stable renminbi is positive for onshore equities, which trade in the domestic currency.

A pivotal year for China bonds

In the latest step in their integration into the global mainstream, renminbi-denominated bonds will join the flagship JP Morgan EM suite of indices in February 2020. As the China-bond asset class enters the mainstream, we think more investors will embrace the high credit quality and attractive yields that this asset class can offer, particularly if they are based in jurisdictions where their domestic bond markets can only offer low to zero yields. Please see our Emerging Perspectives site for more on this topic.

China A-shares take centre stage

As China opens its capital markets, the opportunity for international investors is growing with greater inclusion of onshore Chinese equities into world indices. The MSCI began phased inclusion of China A-shares in 2019. If fully included, China A-shares would account for 16% of the MSCI Emerging Markets Index. These onshore companies allow investors to tap into China’s strong domestic growth drivers.

A bigger part of investors’ portfolios

The broadening and deepening of China’s credit market has seen it play an increasingly important role in EM corporate credit investors’ portfolios over the past five years, as our colleagues discussed in their piece on the fast-growing Asian credit market. Put simply, the market’s becoming too big to ignore.

 

The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations.

Emerging markets (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Wilfred Wee
Wilfred Wee Portfolio Manager
Joanna Yang
Joanna Yang Assistant Portfolio Manager

Important information

This communication is provided for general information only should not be construed as advice.
All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Investec Asset Management.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
All rights reserved. Issued by Investec Asset Management, issued January 2020.

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