As the coronavirus spreads around the world, concerns over a fragile global economy have been heightened. Accordingly, in the past few weeks, global markets have turned to a “risk-off” mode despite central banks announcing interest rate cuts and other easing measures to arrest the panic selling.
Of all the affected countries, China appears to have been one of the first to get the virus under control. Since implementing tough isolation and aggressive preventive measures in the past two months, China has seen a significant drop in infections – from hundreds of cases per day in February, to less than 50 per day this week. At the time of writing (23 March), 72,841 out of 81,602 cases have been discharged, and 292 out of 338 cities have indicated zero infections for the first time since nationwide reporting began in January1.
“For China, that new cases of the virus have peaked is a positive sign.”
A series of monetary-easing measures, such as reducing interbank borrowing costs to their decade low, has been employed to ensure ample liquidity in the market. One result of this has been China’s A-shares outperforming other regional equity markets year-to-date (see Fig. 1).
Fig 1: China A-share market outperformed major equity markets year to date2
“Valuations appear supportive in the China A-share market.”
For China, that new cases of the virus have peaked is a positive sign. According to Nomura Research, the economy is starting to normalise, as evidenced in the pickup in daily coal consumption of major power plants and the increasing “return rate” of workers after the Lunar New Year (see Fig. 2).
Fig 2: Cumulative returning rate of workers and daily coal consumption3
That said, China still faces potential external shocks. The surge of coronavirus cases in the rest of the world presents great challenges to the global economy and supply chains, with the outlook currently remaining unclear.
Against this backdrop, we expect more supportive policies to be rolled out by the Chinese government, including more infrastructure projects, targeted favourable policies towards small and medium-sized companies, and further cuts in required reserve ratios and policy lending rates.
Considering all this, we expect China’s GDP growth to be between 4~5% this year, which corresponds to an earnings growth in the A-share market of approximately 1% to 4% respectively. We also believe that China will continue to foster new sectors of the economy, which includes 5G, healthcare and new consumption, amongst others (as we discussed in “China A: Short-term volatility creates good entry point for long-term investors”).
Currently, valuations appear supportive in the China A-share market. The forward price-to-earnings ratio of the CSI 300 index, trading at 9.5x, is sitting below its 3-year historical average (see Fig. 3) and it is also much lower than its global peers, with the MSCI World Index trading at a forward P/E of 12.3x, according to Bloomberg consensus.
Fig 3: The forward price-to-earnings ratio of China A-shares is significantly below historical average4
In the near-term, the gloomy global growth outlook, coupled with falling risk appetite in global markets, will inevitably weigh on A-share market sentiment. In the longer-term, however, the trend of a structural shift in China remains intact.
At Eastspring China, our Shanghai-based equity team will focus on sectors that have limited overseas exposure and which can benefit from domestic pro-growth policies, as well as those coronavirus-insensitive sectors that can still deliver decent growth for 2020.
- This document is produced by Eastspring Investments (Singapore) Limited and issued in:
- Singapore and Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws.
- Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
- Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
- Malaysia by Eastspring Investments Berhad (531241-U).
- United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
- European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
- United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.
- Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
- The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
- The views and opinions contained herein are those of the author on this page, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this posting is at the sole discretion of the reader. Please consult your own professional adviser before investing.
- Investment involves risk. Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
- Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
- Eastspring Investments (excluding JV companies) companies are ultimately wholly-owned/indirect subsidiaries/associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).