Stay constructive on select China sectors


Stay constructive and selective on industry leaders in the technology and new retail sector
Chief Investment Office24 Aug 2021
Photo credit: AFP Photo


Stay constructive on select China sectors

A series of new policy announcements by the Chinese government negatively impacted market sentiment and drove Mainland China indices to recent lows. MSCI China’s market capitalisation shed USD2.3t to USD11.2t for the week ended 20 August, from the recent peak of USD13.5t in mid-February this year.

The selling widened to non-technology sectors as investors evaluated the new policy announcements. For example, the government introduced policy initiatives to address a wider range of social economic aspects in an effort to balance prosperity and equality.

Even though these measures may impact the near-term profit growth of companies, we do not expect their long-term growth potential to be derailed.

Government regulatory changes and external headwinds are not new. For example, in Figure 1, there have been previous measures pertaining to stock market policy tightening and short selling (point 1), and the trade war from the US (point 2). In each of these instances, the market recovered subsequently. We believe the recent policy announcements (point 3) would not affect the long-term investment outlook.

Figure 1: China equities going through policy changes

Source: Bloomberg, DBS

The recent 30% market correction has been significantly larger than the 10% downgrade in earnings forecast. As a result, we believe much of the policy impact has already been factored in. As these polices are not broad-based, and are geared more towards specific sub-sectors and individual companies, we expect equity prices to soon stabilise.

Figure 2: China equities corrected on recent policy tightening

Source: Bloomberg, DBS

There is also support for sectors that have a pivotal role in advocating the country’s structural shift towards more sustainable and balanced growth.

The policy directions aim to shape a sturdy foundation for the world’s most populous and second largest economy. As the country embarks on a journey to make complicated gadgets and components, and expand the services sectors, the backing of capital markets will be essential. A credible and solid national policy framework to address comprehensive national interests will improve the social-economic structure and forge new growth areas going forward.

Valuations approaching reasonable levels. The recent selloff has led to valuations in terms of price-to-book (P/B) (Figure 3) and forward price-to-earnings (P/E) (Figure 4) to be closer to their historical means, and thus, are no longer overvalued.

Figure 3: China equities P/B ratio

Source: Bloomberg, DBS

Figure 4:
China equities forward P/E ratio

Source: Bloomberg, DBS

Investment Positioning. China’s journey to technology advancement and higher self-sufficiency remains intact. The beneficiaries include the development of AI, big data, industrial robotics, integrated chips, and wafer manufacturing.

We maintain our stance to stay constructive and selective on industry leaders in the technology and new retail sector, and in the sectors of insurance and large banks which have the capacity to distribute attractive dividends.

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.