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Stock-Market Bull in the China Shop

Fiscal Measures Help Boost Chinese Economy and Spur Demand for Equities

While most investors were fixated on the outcome of the U.S. presidential elections, Chinese stocks quietly entered a bull market, rising over 20 percent from levels seen earlier this year. The mainland Shanghai Composite and Hang Seng Index, which tracks Hong Kong listed stocks, are up 22.4 percent and 21.1 percent, respectively, since the end of January, 2016.1

On the back of tightening measures, China’s market has largely stabilized, defying persistent calls for a ‘hard landing’ in the world’s second-largest economy. 

Specifically, the Chinese government recently introduced higher mortgage down payment requirements and restrictions on home purchases in two of its megacities, Guangzhou and Shenzhen. While the property boom has been a critical component for unlocking growth in China’s economy, policymakers have moved to prevent the real estate market from becoming overheated. This has caused investors to shift funds away from hard assets and into equities.

Chinese stocks have been playing catch up to a broader emerging market rally in 2016, and are well positioned to continue their rise given the overall macro backdrop. Furthermore, a recently reported 6.5 percent annual GDP growth rate was inline with the expectations of Chinese government officials, and is one of the fastest rates of economic expansion that investors can find these days.2

 

Chinese Markets Unfazed by ‘Trump Card’

Despite the nationalist rhetoric directed at China by U.S. President-Elect Donald Trump, the market seems unfazed. Chinese stocks have kept their momentum going into the final month of the year, faring better than many other risk assets.

Christine Tan, Chief Investment Officer with Excel Investment Counsel Inc., believes that the superpower nations are far too intertwined to engage in a trade war. “China is one of the largest trade partners with the U.S. and accounts for a sizable portion of the revenue generated by constituents of the S&P 500,” notes Ms. Tan. “I think we will see some walking back of the protectionist rhetoric that dominated Donald Trump’s campaign, as policies that promote trade cooperation between the two countries are beneficial for both economies.”

Chinese officials have also come out and said that if the Trump administration takes a hard stance on open trade, China will buy Samsung products instead Apple’s, and replace Boeing orders with jets from Airbus, making it clear that other nations will quickly fill any voids left by the U.S. Further commentary suggests that the main drivers of economic growth in China are largely domestic. So, while a Trump administration that seeks to close off the U.S. from the rest of the world is undesirable, it will have a limited impact on the Chinese economy.

 

Tech and Consumption Still Leading the Way in China

In the latest roundup of corporate earnings, tech giants Baidu, Inc., Alibaba Group Holding Limited and Tencent Holdings Limited (collectively referred to in the market as “BAT”) all beat analyst expectations, and have helped to push the broader market higher. The integration of technology with one of the world’s largest consumer markets, presents high-quality growth opportunities for investors, while also indicating that China’s shift to a consumption-driven economy is still holding strong. 

Tencent’s numbers were particularly impressive, with third-quarter net profit rising 43 percent from a year ago, primarily on the back of revenue growth from mobile games and advertising. The Shenzhen-based company is now one of the most valuable technology companies in Asia, with a market cap of approximately US$240 billion.3

For Canadian investors looking for a play on emerging themes in China including tech and consumption, the Excel China Fund offers this unique exposure.

From a sectoral point of view, the fund has a 30.5 percent allocation to information technology, and counts Tencent as one of its top holdings.4 Additionally, the fund is positioned to take advantage of anticipated reflation in the U.S., should Donald Trump embark on his promised US$1 trillion, infrastructure spending spree. The portfolio manager is buying more shares of commodity and industrial companies, while selling Chinese exporters.

The Excel China Fund is sub-advised by China Asset Management Company Limited, one of China’s top fund managers which oversees approximately US$194 billion in assets under management.5

 

 

1 Bloomberg data, total return, in local currency terms, January 29, 2016 through November 29, 2016.
2 CNN Money, China’s Economy Holds Steady – But for How Long?, October 19, 2016.
3 Wall Street Journal, China Internet Giant Tencent’s Profit Jumps on Games Gains, November 16, 2016.
4 Excel Investment Counsel Inc. data, as at October 31, 2016.
5 China Asset Management Company Limited information, as at September 30, 2016.

 

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