Chinese New Year is fast approaching as the eventful Year of the Rat gives way to the Year of the Ox on February 12. Last year, China was the best performing equity market in the world and that good run has so far continued into the start of 2021.
Investors are hoping the Ox’s bull-like characteristics will help bring further good fortune this year, as the animal is associated with prosperity, reliability and patience. The three-day celebrations themselves are likely to bring a big uptick in domestic consumer spending, as last year’s festivities were abruptly cut short by coronavirus restrictions.
In Chinese astrology, the Ox represents patience and investors may need that this year, especially if markets struggle to match 2020’s stellar performance - and the economy continues to lag below pre-Covid growth levels. So, after the fireworks have faded from the sky, what are the key themes for investors in China in the Year of the Ox?
Green Growth
China has long been seen as an environmental laggard because the rapid pace of its industrial development has made it the biggest producer of carbon dioxide in the world. But it has tough targets under the Paris Agreement on climate change, and is aiming for carbon neutrality by 2060. With the aim of “net zero” in mind, a new carbon emissions trading scheme launched on February 1. This puts a price on the emissions produced by the biggest polluters such as power companies, which now have to pay for exceeding targets set by the state.
Wenchang Ma, portfolio manager at Ninety One, thinks the scheme is an important staging post in meeting its carbon targets, and will encourage investment in the area from the government and private capital. She also sees significant growth potential for China’s renewable leaders, given that the country already has a wide base of component manufacturers such as CATL (300750), which makes electric vehicle batteries for the likes of Tesla (TSLA), and Xinye Solar, which makes glass for solar panels. Western companies such as Germany’s Siemens (SIE) are already on the ground in China helping to improve energy efficiency in power plants, for example.
Medicine and Food
Siemens, as a provider of medical imaging technology, is also heavily investing in the healthcare boom in China and other emerging markets’, which has been partly spurred by coronavirus and by wider social trends such as people living longer. Rebecca Jiang, manager of the Silver-rated JPMorgan China Growth & Income Trust (JCGI), says an example of this is how local medical supply and biopharma firms used the Covid-19 crisis as a way of taking market share from international companies because they were on the ground during the emergency and could react quicker.
Chinese New Year celebrations often revolve around food, and the Year of the Ox is a reminder of the country’s agricultural roots. But there are wider trends at work as China increasingly relies on food imports to feed its population. Kim Catechis, head of investment strategy at Martin Currie, says health and food security are key themes for China this year, and both have an ESG angle.
Climate change has threatened the global food supply chain with extreme weather affecting harvests; these issues will only intensify as China continues to urbanise and more agricultural workers move to towns and cities. Strong demand has seen “soft” commodity prices rise sharply this year, with ETF WisdomTree Agriculture (AIGA) up nearly 5% so far and iShares Agribusiness (ISAG) 3%. The issue of food security will become a key issue for China’s political leaders, Catechis says, and one which will require them to co-operate with the United States, the world’s dominant food producer.
On a lighter note, urban workers are expected to drink more (and premium priced) alcohol too – and Dutch beer giant Heineken (HEIA) has taken a stake in China Resources Beer (00291), the country’s largest brewer, which is rated as overvalued by Morningstar analysts after two years of very strong share price gains.
Domestic Champions
Ninety One’s Wengchang says Chinese companies, especially in the industrial space, are growing in confidence. Large building projects would historically rely on Western equipment, but some Chinese companies are now building a reputation for quality and reliability – such as Jiangsu Hengli Hydraulic (601100), which makes excavators and lifting equipment. The company’s shares rose 237% in 2020 alone and it is held by a number of UK emerging markets funds, such as Neutral-rated BlackRock Asia Special Situations and JPMorgan China & Growth.
Alibaba (BABA) and Tencent (00700) are now globally renowned companies, and e-commerce platform Meituan (03690) is hoping to join the ranks of this tech elite. The company floated in 2018 and has followed a similar share price trajectory to its two rivals, rising 500% in just over two years. Unsurprisigly, it has attracted the attention of fund managers and Meituan makes up more than 4% of the Silver-rated Scottish Mortgage Investment Trust (SMT).
But Michael Lai, portfolio manager at Franklin Templeton, thinks the most exciting opportunities lay beyond consumer tech. Industrial companies involved in the rollout of 5G technology in the country could benefit most, he says. “The country is now seen as a technology innovator and leader in strategic industries such as aerospace, IT, semiconductors, robotics and will provide some attractive opportunities for investors as ‘national champions’ begin to emerge,” agrees Adrian Lowcock, head of personal investing at Willis Owen.
