Chinese equities have become even more attractive to global investors as the nation's robust economic recovery backed by a strong domestic market provides a stable and predictable environment amid COVID-19-related global uncertainties, top asset managers said.
BlackRock, the world's biggest asset manager, with $9.01 trillion under management, is favoring Chinese equities that benefit from accelerating domestic consumption and other long-term trends, while having added investment in some upstream sectors like energy since the fourth quarter of last year, said Lucy Liu, a portfolio manager at BlackRock.
The New York-based fund management giant believes that a steady recovery in China's domestic demand will shield the country's economy from rising global uncertainties surrounding COVID-19, after the total global number of new infections reached the record high of 5.2 million last week.
"I don't think that the demand for Chinese assets will go down. In fact, I think it will go up in light of such uncertainties," said Nicholas Chui, another portfolio manager at Black-Rock. The risk of an overseas resurgence in infections might cloud external demand, but the virus has continued to be well contained in China and the domestic demand recovery remains intact.
Given the dominant role of domestic demand, China's economic recovery will remain "sustainable and predictable" and support BlackRock's positive view with regard to Chinese equities this year, Chui said.
Chui added that BlackRock especially prefers Chinese companies that benefit from accelerating domestic consumption, the dual-circulation paradigm that strengthens the domestic supply chain and the country's push toward sustainable development.
China's economic growth in the first quarter of the year hit a record 18.3 percent as the recovery in domestic demand picked up steam. Retail sales grew 34.2 percent year-on-year last month, up from 33.8 percent in the January-February period, according to the National Bureau of Statistics.
Offline consumption activities rebounded in March, as catering sector revenue posted positive growth compared with the same period in 2019, the first time since the COVID-19 outbreak, the bureau said.
Zhu Haibin, JPMorgan's chief China economist, said retail sales recovered "remarkably" last month and should continue to improve thanks to the combination of improving household incomes, further stabilized employment and better control of COVID-19.
However, these stronger economic prospects have been accompanied by a degree of monetary policy uncertainty which may continue to cause market volatility, according to Zhu.
Concerns are growing over whether ongoing global reflation will force the US Federal Reserve to increase interest rates earlier than expected, which could tighten market liquidity and cause a plunge in asset prices. Domestically, investors are nervous about any potential acceleration in policy normalization by the nation's central bank, he said.
Amid this mixed environment of improving fundamentals and stimulus withdrawal, China's A-share market has been wobbling for over a month, following a sharp correction starting in February. The benchmark CSI 300 index edged down 0.19 percent to close at 5089.24 points on Thursday, 14 percent lower than its all-time high on Feb 18.
Volatility may still haunt A-shares, but structural opportunities in sectors like consumption and upstream industrials abound, especially as the recent market correction has made valuations more reasonable, asset managers said.
"Investment opportunities in quality companies deserve attention as their valuation has pulled back," said Lynda Zhou, chief investment officer for equities in China at Fidelity International, a global asset manager.
Since the broad-based uptrend driven by loose liquidity has come to an end, investors should focus on capitalizing company-specific opportunities provided by sustainable and strong corporate earnings, Zhou said.
Yu Jingwei, an asset allocation analyst at CITIC Securities, said upside potential in the A-share market this year will mainly come from structural opportunities, or individual stocks whose earnings outlook can offset pressure on valuations.
The outperformers may come from cyclical sectors where the recovery in supply cannot swiftly catch up with demand, such as ferrous and nonferrous metals, companies that are the biggest beneficiaries of the global recovery, and manufacturers whose profitability will improve as the rise in commodity prices tapers, Yu said.
