Consumer and property stocks to ride on wave of urbanisation on mainland
Property stocks will also benefit as more mainlanders move from villages to city areas
The mainland's push for urbanisation as part of its economic development next year will benefit a range of stocks in the consumer and property sectors.
Shares of companies in the real estate, retail, restaurant, tourism, health care and skin care industries would benefit the most from the urbanisation process, fund managers said.
Promoting domestic consumption and urbanisation will be the key economic policies on the mainland next year, according to a statement issued two weeks ago by Xinhua after the country's annual economic policy-setting conference.
The conference is seen as setting the tone for the development of the world's second-largest economy next year and is considered doubly important as it was the first such meeting held under the new leadership.
"Restaurants, services industries and tourism would be the sectors to benefit the most from urbanisation, with increasing numbers of people moving from villages to live in city areas," said Virginie Maisonneuve, head of global and international equities at British fund house Schroders.
Maisonneuve said urbanisation on the mainland and the increasing number of the country's middle class had led to changes in consumer habits.
Unlike those who live in poor remote areas and spend the biggest share on basic necessities such as food, people in urban areas tend to earn a higher income and spend more on services, entertainment, fashion and beauty products.
According to a McKinsey report quoted by Schroders, the mainland's household consumption rose to US$1.55 trillion in 2010 from US$640 billion in 2000. This is expected to increase to US$4.38 trillion in 2020.
In terms of spending on food, the ratio decreased to 28 per cent of total household spending in 2010 from 43 per cent in 2000. In 2020, it is expected to drop to 20 per cent.
The rest is spending on personal items, recreation equipment, housing, health care, transport and communications.
"As income rises, people tend to spend more on services, such as hiring domestic helpers, dining out at restaurants or travel. They also pay more attention to health care, insurance and other financial services," Maisonneuve said.
With the demand driven by urbanisation, Maisonneuve said the mainland's economic growth would continue and stocks in the services sector would benefit.
"I do not think China will have a hard landing. Economic growth may slow a bit from previous years, but at about 7.5 per cent, it is still very high when compared with many Western countries," she said.
Cathay Conning Asset Management chief executive Mark Konyn said investors globally had been focused on the domestic consumption story in China since the onset of the global financial crisis.
"The difficulty has been how to gain access," Konyn said. "Until the authorities clamped down on speculation in the property market, buying property-related stocks was considered the most direct play on the consumption theme. Other consumer names were widely held during the market recovery post-crisis and consequently valuations became very rich and largely unjustified as earnings disappointed.
"Looking forward, investors are likely to crowd around themes driven by government policy and measures to invest in infrastructure and broaden wealth creation."
Invesco chief investment officer, Asia ex-Japan, Paul Chan Pak-kui said urbanisation would continue on the mainland. "The development of satellite cities of 1 million to 3 million people will continue. Investment ideas include property, capital goods and infrastructure plays," Chan said.