Ringing In The Chinese New Year - Patience Will Be Rewarded

Over the past three decades, the Year of the Ox has arrived around stock market crashes and their recoveries. Appearing every 12 years, the 1997 and 2009 Oxen surfaced around the Asian Financial Crisis and Global Financial Crises. This year the Year of the Ox has come at a better time, as economies and markets seek to recover from the Covid-19 pandemic.

The Ox is the second animal in the 12-year cycle of the Chinese zodiac, with the Rat first in line¹. One myth claims the Jade Emperor, Ruler of Heaven, said the animals’ order would be decided by the sequence in which they arrived to his party. The Ox was on track to be first, but the Rat tricked him into giving him a ride. Just as they got there, the quick-witted and resourceful Rat jumped down and landed ahead of the Ox². Would 2020 have been different if the Ox, known for being stable and patient, arrived first?

Entering 2021, the Ox’s arrival is synonymous with investors’ desire for stability. We see encouraging signs that China’s V-shaped recovery is already heading toward normalcy, testament to its quality of governance and health care systems. China, for example, handled the pandemic response well and quickly rebounded, with its manufacturing supply chains returning to near full capacity quickly following the outbreak. As we look towards recovery, and hopefully a more stable post pandemic world, there are several reasons to be excited about China in 2021.

China is at the forefront of technological innovation. In the 1990s, investors focused on the country’s industrial assets – where companies were mostly state-run. The next decade was fuelled by demand for infrastructure and commodity supplies. But today, the focus is on innovation and the consumer sector’s growing demand for technologically savvy services and products. As China has evolved, so have our assessments of the companies that we believe can create value. We remain focused on names that are steadfast in their pursuit of achieving sustainable earnings power. We consequently favour firms in the consumer and technology-oriented sectors as they have created robust planks for sustainable earnings, and are invested in those companies which have a wide range of products and offerings to meet changing demands of the consumer and enterprise. These include household names such as Tencent and e-commerce giant Alibaba which continue to drive growth with their new initiatives and investments.  

China’s economic and market growth prospects also remain favourable. It was the only major global economy to avoid a contraction in 2020, with GDP expanding 2.30%³, and set to further increase in 2021. Notably, the Chinese consumer opportunity is still one of the most attractive and exciting opportunities for investors. To a large extent, Chinese consumers have already emerged from the pandemic and there is a very large middle class looking to spend on better things, better experiences, better products, and better services. This appetite has created a premiumisation opportunity in the heart of the consumption story. We have also seen the continued liberalisation in China’s financial markets which has driven increased foreign ownership of China’s domestic A-share markets. In general, valuations remain attractive and are not at an extreme, and with the rise in initial public offerings, the market provides ample opportunities to deploy capital. In the short-term, it may appear that the stock market is quite euphoric. Therefore, although investors may be tempted to chase momentum, they must also be patient, much like the Ox, and remain focused on those companies that create long-term value.

In terms of sectors, digitisation, adoption of technology and further consolidation across certain industries should all feed into the long-term opportunities in China. The clean energy sector, including generation and storage, have ample opportunity for growth. We anticipate the decarbonisation of China’s economy—a key pillar of its green transformation strategy announced in the 2021-2025 Five Year Plan—will continue to accelerate. Since the previous Year of the Ox, China has emphasised the adoption of solar panels in industrial infrastructure and wind power, with costs plunging as companies scaled up production with improved efficiency. This has resulted in increased adoption on the commercial side and enabled reduced government subsidies. China now leads the world in clean energy production and produces more than 70 per cent of all solar photovoltaic panels, half of the world’s electric vehicles and a third of its wind power⁴. Moving forward, we anticipate a widespread increase in the adoption of renewable energy technologies.

As we usher in the Year of the Ox, we believe China is on track for a strong rebound. The Ox has traditionally been used to plough farms and is steadfast in its commitment to create prosperity over seasons. For investors looking for their next move, try to resist the urge to chase momentum - patience and long-term sustainability will be rewarded.