Quality will triumph volatility. China equities started the year on solid ground but surrendered its stellar performance and trailed that of global equities (Figure 1). Year-to-date (YTD), China equity index is flat compared to nearly 9% returns recorded by global equities. Some of the catalysts have taken longer than expected to materialise.

Among the headwinds surrounding China equities are slowing export momentum, tensions in the North Asia region, and uneven macro data readings. Nonetheless, we maintain the view that the performance of selected China-centric sectors should turn out well, as the momentum post reopening gains pace and market dislocation reverses.


Figure 1: China and global equities (Normalised)


Our ongoing constructive stance on China focuses on the following themes and adheres to our CIO Barbell Strategy framework. On the income side, we prefer China large state banks which reward investors with continuous and attractive yields. On the growth side, we continue to favour the insurance sector and large technology platform companies that have demonstrated solid profit track records. They are also beneficiaries of consumption recovery riding on the reopening momentum.

Favour large state-owned banks. China financials have delivered good share price performance since the conclusion of China’s Party Congress and have further extended their gains YTD. China insurance and the broad financial sector returned 60% and 35% respectively since end of October 2022 (Figure 2), with YTD gains of c.10% driven by:

1. Expectations of US rate hikes coming to an end. This development should reverse the yield compression between China large banks and bonds
2. Narrowing of steep valuation discounts
3. Resumption in total social financing growth to 11.7%, back to the level last seen in January 2022
4. Sustainable dividend yields and the appeal of total returns (Figure 3)


Figure 2: Performance of China financials and insurance sectors (Normalised)



Figure 3: The importance of total returns (Normalised)



Constructive on China’s insurance sector. We are constructive on China’s insurance sector owing to its fundamental importance to the vast population, promising operating environment, and growth outlook. Life insurance annual premium reached CNY2.5t at the end of 2021, delivering an impressive CAGR of 10% between 2012 and 2021 (Figure 4).
Another supportive driver is the low life insurance penetration in China which was merely 2.2% of GDP as of 2021, considerably lower than those of other markets such as Hong Kong (20.5%), America (12.4%), Singapore (11.4%), and OECD countries (9.4%). Upside potential for the sector’s revenue and profits in the coming years remains encouraging as life insurance penetration in China accelerates.


Figure 4: Upside to insurance penetration



Notwithstanding their recent outperformance, China insurers are trading at 6x forward earnings (Figure 5), which is not demanding at all. The sector’s revenue and profitability have stayed robust and remained unscathed over the past few years. The divergence between the sector’s market capitalisation and total addressable market is also unwarranted. Between 2009 and 2019, the sector’s market capitalisation-to-total premiums was at the range of 1.5x to 2.0x but this ratio has declined to 1.0x since 2021 (Figure 6). We believe China insurance stocks will be rerated up from current levels.


Figure 5: Valuations at multi-year low



Figure 6: Divergence between market capitalisation and total addressable market



China digital platform companies lagging. The performance of China’s technology sector has not panned out as we expected, owing mainly to ongoing policy uncertainties which have dampened sentiment and share price performances.
Given the moat-like structure and resilience in earnings, the sector’s share price weakness is unjustified (Figure 7). There are obvious bifurcations in share price performances among industry players where sector leaders with consistent profitability and solid earnings growth are trading at reasonable valuations in contrast to less profitable or loss-making peers.


Figure 7: Weakness in China Internet unjustified


The proposed splitting and listing of operating units by Alibaba sets a precedent for the sector, which would ultimately see the moat-like divisions realise value and free the holding company of its “conglomerate discount”. The split will also offer investors more targeted investment choices, be it advanced technology or digital commerce.
Given existing trade restrictions and slowing external demand, China’s government is incentivised to expedite the development of its already deep domestic and technology supply chain.
Support for the long term. We expect more resources to be allocated and policy support across verticals to accelerate the recovery in China’s domestic consumption, support for the banking system, and advancement of the digital roadmap in the march towards self-sufficiency.