Outlook for China 2019: Navigating uncertainty

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MEDIA RELEASE Ten years on from the financial crisis, a range of economic and political factors have caused investors to call into question just how much steam is left in the longest bull market in history. Against this backdrop, Fidelity International’s China-focused portfolio managers share their outlook for 2019, the risks and opportunities. 

Raymond Ma, portfolio manager for the China consumer sector, comments: “Chinese equity markets are expected to remain volatile in the near term, due to concerns around escalating trade tensions between the US and China, a depreciating renminbi and a potential slowdown in the Chinese economy.

“Given the rise in trade tariffs, Chinese corporates are expected to witness a decline in exports, and a reduction in earnings and capital outflows, as some companies consider shifting their production base outside China.

“The good news is that the Chinese government is likely to introduce more fiscal and monetary loosening policies to support the domestic economy and consumer sector. As a result, money supply and liquidity conditions should improve going forward.

“We could also see an acceleration in fixed asset investment growth, while consumption growth is expected to remain relatively resilient. Ongoing supply-side reforms are also likely to boost China’s production efficiency and improve corporate earnings. 

“With the recent correction in equities, market valuations have fallen. Consequently, we may see a window of opportunity in the next two to three quarters as some resolution is reached on the trade war.”

 Jing Ning, China portfolio manager at Fidelity International, adds: “China has entered a relatively low-growth phase of economic activity, compared to a decade ago. This has positive implications: the economy is likely to be less cyclical, and structurally driven by consumption, rather than fixed asset investment.

“Chinese corporate balance sheets have significantly improved and companies are more conscious about capital expenditure, while managements are adopting a more mature approach towards efficient capital allocation and reducing leverage. In a distinct shift towards increasing shareholder value, dividend payouts are also garnering attention, which markets have so far under-recognised.

“The external trade-related matters reflect the emergence of a new age in Sino-US relationships, where there is likely to be less emphasis on cooperation. Nonetheless, the momentum of innovation at Chinese corporates is quite positive, which provides thrust to its extensive integration in global manufacturing value chains. 

“China also has substantial human capital in its universities and vocational schools, which it can potentially monetise over the next decade in areas such as automation, health care, media and technology.

“As China faces external uncertainty, it will respond with measures to stimulate internal growth. Chinese policymakers have a clear intention to support economic activity, which they have demonstrated on several occasions in 2018. The series of Reserve Requirement Ratio cuts seen during the year is one such manifestation of this intent. While the impact of additional liquidity will be felt with a lag in the economy, it confirms that policymakers will be proactive.”

 Opportunities

Jing Ning comments: “There are opportunities in energy, industrials, high-quality real estate and select consumer-led areas of the market. The technology sector has also started to look interesting after the recent sharp correction in valuations.  I continue to adhere to my long-standing value contrarian investment style, with exposure to positions that provide earnings visibility over a 3-5 year horizon. There is no preference for old economy versus new economy. The focus is on well-managed businesses that look to have a long runway of growth and should benefit from the structural shifts in China.”

 Raymond Ma adds: “I remain focused on ‘New China’ sectors, as they look to be less sensitive to short-term macroeconomic headwinds. In particular, I remain positive on consumer, insurance and pharmaceuticals companies.  I also remain positive on companies that are engaged in automation and artificial intelligence (AI), big data, and cloud businesses, as well as those that are focused on domestic consumption and have exposure to the electric vehicles segment.”