At the end of this volatile year, Chinese equities followed global markets and extended gains in December. The general investment market sentiment remains encouraging with numerous positive drivers present, the CSI 300 Index and the Shanghai Composite Index gained 5.06% (5.89% in USD terms) and 2.40% (3.21% in USD terms) respectively, the Hang Seng Index on the other hand rose 3.38% (3.36% in USD terms).
Looking ahead in the New Year, Chinese equity markets remains on our radar as one of the markets with great growth potential. Fundamentals stayed strong throughout the second half of 2020, with most indicators staying on the uptrend in consecutive months, the overall economic growth in 2020 is expected to stay positive, and should see faster than trend growth in 2021. Although we expect both fiscal and monetary policies in China to stay modest, ruling out large increases in stimuli and possibilities of rate or RRR cuts, we also do not expect significant tightening on both ends.
With modest policy support expected, picking sectors that better fit into the China’s mid to long-term development direction would likely yield better results. Ones such as consumption related sectors, or tech & innovation related ones, should see better long term growth prospects. As the development direction should bring additional capital flows, this to a certain extent justifies their current valuation. Henceforth, positioning ourselves in these sectors should get us a better risk-adjusted return in the longer investment horizon.
