Will China lead the global recovery?

By Morningstar |  11-04-20 | 

China’s manufacturing sector made a surprise recovery in March.

The official Purchasing Manager’s Index (PMI) was 52 for the month, compared with a record low of 35.7 in February. (A reading above 50 indicates expansion, while one below reflects contraction). China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also recovered to 52.3 from 29.6 in February.

But while it tiptoes to recovery, we don’t really know how it will pan out. The optimistic projection is that growth could be 3%, the worst case scenario is no growth at all.

While they came out with a huge stimulus package post the 2008 GFC, they are pretty restrained in 2020. The U.S., European countries, Japan, and India are all looking at rescue packages or economic stimulus plans. Strangely, not China. However, news reports state that while China has rolled out fiscal and monetary support measures, in the coming months they may come out with some stimulus.

Global management consulting firm Kearney, in a report stated that the trade war and pandemic have disrupted global supply chains. And the U.S. is looking at other countries for manufactured imports, Vietnam and Mexico being the favourites. And while China will stay the world’s largest exporter, its big export markets are looking at a recession.

In such a scenario, what are investors looking at in China?

Morningstar UK’s senior editor Holly Black spoke to a number of asset managers to get their view on China.

Ned Salter, Fidelity International

Optimistic about the rebound in consumer spending in the country as life slowly returns to normal after months of lockdown. Confident about the outlook for supermarket chains, which have seen business boom as households have stocked up on goods in recent months. But reasons to be cautious too.

While 80% of retail stores have no re-opened, sales remain down as some households are clearly still practising social distancing and limiting their outings. Estimates suggest retails sales in March were down around 40% compared to the same month last year.

For now, consumer staples such as food and personal care products are driving much of consumer spending rather than luxury goods. Uncertain economic conditions makes people delay spending on big-ticket items such as travel and jewellery.

China’s experience, from initial outbreaks to ensuing lockdowns, has served as a leading indicator in this global pandemic. Now the signs of a consumer-led recovery in domestic demand should offer a dose of cautious optimism to the world in panic.

Jason Pidcock, Jupiter Asset Management

Increased stake in telecom giant China Mobile because it is a resilient business even in a downturn.

Added to investment Hengan, a Chinese producer of personal hygiene products including tissues, nappies and sanitary towels, and now face masks. The business is an established brand with a strong distribution network. The company is benefiting from a decline in raw material prices while demand for personal hygiene products is strong right now. This should be the case even after the coronavirus has passed, because events like this often trigger permanent adjustments to personal lifestyle.

Zehrid Osmani, Martin Currie

There could be widespread cuts to dividends among Asian companies as earnings are hit by lockdown measures.

There will be opportunities in areas where the government will be ramping up spending to combat any slump in economic activity such as healthcare infrastructure. Also increased spending in rail infrastructure, notably high-speed railways. The 5G telecom infrastructure upgrade could be accelerated.

While the coronavirus outbreak may change the short-term opportunities, the trends that make China attractive over the long term have not changed: a growing middle class driving consumption and growth in financial services, as well as a thriving and innovative technology sector.

Michael Kerley, Henderson Global Investors

Reducing investments in banks across Asia including those in Singapore, Taiwan, Indonesia and Australia. But the two Chinese banks in the portfolio stay. Banks in China are over 50% owned by the Ministry of Finance and have payout ratios of only 30% (compared to 40% for banks globally). (explained here) Because the dividends they pay account for only around 30% of company earnings, it should make them sustainable even through a downturn.

With pressure on dividends in some key sectors in Europe, Asia will stand out as a relative beacon of stability for income investors struggling to find alternatives in this environment of record low interest rates.

Other sectors may be less resilient, such as retail mall operators, where the government has ruled that tenants may have a rent holiday.

Pruksa Iamthongthong, Asia Dragon Trust

Digitalisation is already a structural trend that could accelerate because of the coronavirus crisis.

As home-working and self-isolation become widespread, online giant Tecent will benefit, with individuals turning online for entertainment such as gaming and film streaming. Tencent is well-positioned because of its WeChat (similar to Whatsapp) ecosystem. It lies at the heart of communication and in facilitating businesses in moving their activities online.

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