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China’s services and manufacturing PMIs rebounded back to expansionary levels after May, while the rest of the world are still seeing PMIs of under 50. The rebound continue to beat analyst’s expectations and surprised positively, indicative of the robustness and speed of China’s domestic-led rebound.
This is the result of successful containment of the outbreak leading to an earlier exit from lockdown. Plainly, this means more time for China to recover and implement stimulus support.
As a result, China’s GDP growth is expected to surpassed peers in 2020 and 2021. It is one of the few nation expected to generate positive growth in 2020, when many major economies will be facing a contraction.
In addition, unlike trade-dependent economies, the ability of the Chinese economy to drive growth through domestic production and consumption allows it to weather the disruption to supply chains and foreign demand from Covid-19.
The combination of reasonable valuations and robust earnings growth meant that upside potentials remains pretty attractive (20% for China A and 60% for China H) for China equities ahead.
Strict handling of pandemic led to minimised probability of second wave
Chart 1: China has been quite successful in containing the pandemic
Speed of recovery outpaces regional peers
Chart 2: China’s manufacturing PMI back above 50, suggesting faster recovery than peers…
Chart 3: … Same goes for services PMI
Chart 4: PMIs have beaten estimates for most of the months after March
Growth slated to surpass peers in 2020 and 2021; the only economy to avoid a contraction this year
Chart 5: China the only major economy/ region to see positive GDP growth in 2020
Trade & domestic demand both recovering. But domestic demand recovery is much stronger
Chart 6: Household consumption has grew in importance in driving the growth of China’s economy.
Rebound in credit growth supportive of economy and corporates
Chart 7: Government have stepped up injection of credit in March
Chart 8: Positive credit impulse growth suggests further growth for EPS
Cheap valuations and robust upside potentials
Chart 9: Despite the robust rebound of over 20%, forward PE of China A is only trading slightly above the long-term average.
Chart 10: China H equities are still trading below the average PE level, which mean there is plenty of room for further upside ahead.
Table 1: Upside potentials of China A and H markets are +20% and +60% respectively by end-2022.
|
Market |
Index |
2020E EPS Growth |
2021E EPS Growth |
2022E EPS Growth |
Current Forward P/E (X) |
2021E Forward P/E (X) |
Fair P/E (X) |
Potential Growth (by 2021 end） |
|
China A |
CSI 300 |
3.0% |
16.0% |
12.1% |
12.5 |
10.9 |
13 |
20% |
|
China H |
HSML100 |
1.6% |
13.1% |
11.6% |
7.73 |
6.94 |
12 |
60% |
|
Source: Bloomberg Finance L.P., Wind, iFAST estimates. Data as of Jul 2020. |
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Table 2: Recommended products for exposure to the individual markets/ segments across the two major asset classes (fixed income & equities)
|
Region/ Markets |
Active (Funds) |
Passive (ETFs) |
|
|
China |
A Shares (On-shore) |
||
|
H Shares (Off-shore) | Fidelity China Focus A-USD | ||
Chart 11: China A equities have been rather volatile in the last few years, but they have a robust earnings growth trend to back them up.
Chart 12: China H equities have lagged China A equities due to idiosyncratic factors, which translates to opportunities for greater upside capture as the gap closes.
The Research Team is part of iFAST Financial Pte Ltd.
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