About a year ago, Winnie Chiu, Hong Kong and China equity specialist at Indosuez Wealth Management, predicted that China tech stocks would steal the show.
This came on the back of a busy 4Q2020 for the Hong Kong, Shanghai and Shenzhen bourses, with 536 IPOs raising US$119.1 billion ($160 billion) in proceeds.
In her 1H2021 outlook, Chiu said: “In China, the diversity of tech companies is not as wide as that in Hong Kong. Now, those on the mainland can invest in tech listings in Hong Kong through Stock Connect. So, I do see that there will be more follow-up buying into China’s tech companies being listed in Hong Kong.”
Chiu was eventually proven right that Chinese Internet companies would grab headlines in 2021, though in a drastically different sense.
Following Ant Group’s US$37 billion IPO in Shanghai and Hong Kong that was yanked in November 2020, China’s various tech giants have found themselves the subjects of sweeping regulatory changes.
Billed as a move against its tech billionaires, China insists the tougher regulatory measures are being carried out in the interest of “common prosperity”.
See also: China tech stocks to steal the show: Indosuez
On Dec 6 last year, the Hang Seng Tech Index closed down 3.3% — its biggest decline in nearly two months — to the lowest level since its launch in July 2020. Alibaba Group Holding and JD.com were the biggest losers, each sinking at least 4.9%. Both companies are also traded in the US.
That close came three days after Chinese ride-hailing firm Didi Global’s decision to delist from the New York Stock Exchange just five months after its debut, as Beijing tightens its grip on the data-rich private sector.
But these pains could be the final throes for the beleaguered sector, says Chiu. Speaking at Indosuez Wealth Management’s 2022 Asia market outlook on Jan 19, Chiu thinks China’s regulatory tightening may have already surpassed its peak last year.
See also: Watch out for these signposts as China strives for 'common prosperity': Indosuez
She says: “China aims to curb the impact of a sharp economic slowdown, and we believe that the leveraging and regulatory crackdown we saw last year will be put on hold.”
“One of the biggest questions for investors of Hong Kong and China stocks would be whether the price has already priced in, or accounted for, all the regulatory headwinds,” says Chiu. “If Beijing wants to contain risks and promote stability, they have to strike a balanced policy going forward.”
China’s 2022 Two Sessions in March could be an inflection point, Chiu adds, with “more concrete progrowth measures” being announced.
“Beijing will likely introduce a RMB1.5 trillion ($319 billion) package involving tax cuts and fees. Hopefully, these measures will help alleviate investors’ concerns,” she says.
According to Chiu, Beijing has revealed that they will introduce a series of policies to safeguard economic stability. “According to the Ministry of Finance, China will speed up fiscal spending by cutting taxes and fees. Meanwhile, the People’s Bank of China (PBOC) will increase financial support for infrastructure, green energy investment and promote a soft landing in the real estate market.”
Aside from China’s flashy tech names, the property market plays an outsized role in China’s economy.
In 2020, 51.5% of investment in fixed assets nationwide was driven by real estate, according to Chinese financial services company Soochow Securities.
See also: After spurt and slump, Asia Pacific stocks to do better in 2H2021: Indosuez
China’s top real estate developer has been the focus of the world for months, as investors watch for China Evergrande’s ability to repay its debt and the potential spillover to China’s economy.
In response to the hard-hit real estate sector, Chiu thinks Chinese banks will take down more mortgages and give financing loans for property developers.
For investors with a long-term view, 2022 is a “good time” to enter stocks and sectors that align with the next phase of economic development in China, says Chiu. These sectors include renewable energy, high-end manufacturing and mass market consumption plays.
“On a sequential basis, growth momentum will bottom out this quarter and gradually pick up in the second quarter,” she adds.
‘Insensitive’ Asian equities
Meanwhile, Chiu sees three investment themes for Asian equities.
Firstly, investors will prioritise real returns going forward. “Earnings delivery will be the key driver of stock performance in a rising rate environment. We believe the market will continue to reward companies that demonstrate sustainable growth. Therefore, we are positive on banks, financials, consumer staples, renewable energy, tech hardware and semiconductors.”
Next, countries committed to achieving net zero emissions will require more capital. “Climate change is forcing the government to accelerate decarbonisation. Transitions from fossil fuels to clean energy will be driven by huge investment in new energy infrastructure and the shift from carbon-heavy industries to reduce emissions.”
According to the International Energy Agency (IEA) and World Bank, emerging countries will need to spend at least US$1 trillion a year over the next decade in order to achieve net zero emissions by 2050, Asia included.
“We believe stocks such as energy solutions, renewable energy and alternative energy will continue to be in favour,” says Chiu.
Financials and banking stocks win again in Indosuez’s third theme. “Now, as interest rate rises, banks will outperform on improving net margins and financials will continue to enjoy higher portfolio yields,” says Chiu. “We are therefore positive on Asian financials, especially Singapore banks with strong fundamentals in the region. Elsewhere, major banks in China with less exposure to real estate should benefit from a larger credit impulse led by the PBOC.”
Given the higher interest rates and normalised economic growth, earnings per share in the region will grow by around 11%, and around 14% in China, says Chiu. “China, South Korea and Taiwan are the most attractive in terms of PE-to-growth valuation.”
In addition, Chiu thinks that China, South Korea and Singapore will do better because these markets are less sensitive to interest rates. “Risk management will be more important given the uncertainties. The biggest challenge is the pace and timing of rate hikes. Asia will have a heavy schedule of political events this year, and credit default risk in China should not be ignored.”
The spectre of Trump
On that note, Chiu also highlights a senior leadership change in China this year. In 2022, Xi and other top leaders will be focused on the 20th Party Congress, slated to happen sometime in the latter half of the year.
“Historically, if we look into 2012 and 2017. Beijing has often attempted to beat the target growth rate during years of top leadership changes,” says Chiu.
Similarly, the US is not rid of former president Donald Trump. “I don’t think that Trump is gone forever. He’s going to the midterm elections coming up in November, and it seems Biden is not particularly popular right now,” says Ryan Landolt, senior equities advisor, Asia, at Indosuez Wealth Management.
Landolt thinks it is “very, very likely” that the Democrats may lose majority control of the House of Representatives and Senate. “Then, you go another two years into 2024. Well, guess who’s going to be the presidential nominee in all likelihood.”
US-China tensions have been fairly complicated over the past year, notes Chiu. Behind China’s supposed “common prosperity” crackdown on tech companies, technology is actually at the front-line of the competitive strategies between the two countries, she adds.
As the US enters midterm elections and China appoints new Central Committee and Politburo members, confrontation is “quite likely”, says Chiu.
“But on the other hand, we also can see some changes of both sides being more pragmatic. The US and Chinese companies are deeply integrated and they certainly do not want to embrace some kind of decoupling. I think that the tension is likely to continue, but there is also room for upside surprises,” she adds.
Photo: Bloomberg
Infographics: Bloomberg, Indosuez Wealth Management
