2020 vs 2014 -15: Four differences in China’s market rally

China’s current market rally is taking place against a different macro, monetary and liquidity backdrop, compared to the bull market from late 2014 to 2015. At the same time, internal reforms and external pressures have increased China’s resilience, accelerated structural changes and established new growth drivers. As the new China takes shape, more investment opportunities associated with China’s new economy will emerge, rewarding active investors who are early to the game.

China’s CSI 300 Index is up 10% year to date1, outperforming regional and global peers. While the market’s rally has received much attention, the recent strong performance of the securities companies has been particularly eye-catching, up 17% since the end of June2. For some investors, this brings back memories of China’s spectacular bull market in 2014, which was also accompanied by a sharp rise in the share prices of the securities companies. Since the bull market of 2014 came to a sudden stop in the summer of 2015, should investors treat the current rally with greater caution? We note four key differences between 2014’s bull run and today’s market rally.

Thanks for subscribing!

Follow us :

Macro backdrop. China’s economy grew at its slowest pace in 24 years in 2014, undershooting the government’s target for the first time since 1998. In fact, it was the first time that the economy grew below 7.6% since 1990. With hindsight, 2014 probably signaled the start of the end of China’s fast-paced growth path as it transitions towards a more sustainable economic model that is less dependent on fixed asset investments, lower-end manufacturing and credit expansion.

Today, China’s economy has rebounded sharply (+3.2% yoy) in the second quarter of 2020, reversing its pandemic-induced contraction (-6.8%yoy) in the first quarter. Not only has the rebound exceeded consensus estimates (1.9% - Bloomberg survey and 2.9% - Wind survey), the economy is expected to recover further in the second half of 2020 as demand and activity normalises.

Monetary policy. To stimulate the economy, the People’s Bank of China (PBoC) started cutting interest rates from the end of 2014. In 1H2015, the central bank had cut interest rates and the reserve requirement ratio three times each. As risk free rates fell, risk appetite rose, and valuation multiples expanded. It was the first interest rate cut in late 2014 that marked the start of a new monetary easing cycle which triggered the rally in the securities companies’ shares.

While China too began monetary easing in 2019, it was part of a much larger reform to liberalise interest rates. In August 2019, the PBoC established that new corporate loans had to be priced with reference to a revamped benchmark (Loan Prime Rate or LPR) that tracks the price of credit to banks’ best customers. The LPR in turn was linked to the rate the PBoC charged lenders for cash over one year (Medium Lending Facility). By linking the market and official rates, the PBoC hoped to improve the transmission mechanism and lower the cost of borrowing. Not only was the mechanism and nature of monetary easing different between the two periods, the 2014 rally in securities companies’ shares was triggered by the first rate cut while the current rally only picked up momentum recently, in the latter stages of China’s monetary easing cycle.

Sources of liquidity. In 2014-15, new market inflows came mainly from margin financing, margin lending from online platforms and structured trusts with leverage facilities. In the current rally, guided by the lessons from the past, the Chinese regulators have exercised rigorous control on margin lending facilities. At the same time, we have observed strong inflows from the Stock Connect Scheme and institutional investors, suggesting that the fund flows into the China market this time around may be higher quality and “stickier”.

Economic development. China has undergone significant economic transformation since 2015. In the last five years, it has enacted supply-side reforms, attempted financial deleveraging and navigated US-China tensions. These internal reforms and external pressures have increased China’s resilience, accelerated structural changes and established new growth drivers. Amid the unprecedented challenges arising from Covid-19, China’s new economy has marched ahead.

The uncertainty surrounding potential new waves of Covid-19 infections and persistent US-China tensions could cloud China’s macro outlook and create market volatility in the near term. Over the long term however, even as China’s economy continue to slow to a more sustainable growth trajectory, we believe that more investment opportunities associated with China’s new economy will emerge. In addition, the top tier companies’ ability to achieve steady growth even under an uncertain macro environment will become more prominent. Active investors who are able to identify both the emerging trends early in the game as well as quality companies with good fundamentals, are likely to be well rewarded.

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, 125 Old Broad Street, London EC2N 1AR.


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).