Investors eye China stocks and energy sector amid economic and Covid-19 pandemic recovery

This article was part of a special supplement on private banking which was published in the South China Morning Post print edition on October 20, 2021.

China stocks, equities in laggard markets and energy plays could emerge as interesting opportunities for investors in the last quarter of 2021, with the ongoing economic and pandemic recovery possibly helping to fuel some of these opportunities.

Mainland China plays are likely to remain a big focus for investors. Despite a sometimes fragile economic recovery, a regulatory crackdown and debt concerns, there is optimism that the last remaining months of 2021 will end up in the green.

“China’s stimulus is coming since it is the only way to avoid a cliff in growth in 2022. This should lift the Chinese and Hong Kong stock markets at least temporarily, maybe even globally,” said Alicia Garcia-Herrero, chief economist at French corporate and investment bank Natixis.

The People’s Bank of China added liquidity of 100 billion yuan (US$15.49 billion) on a gross basis each day for five consecutive sessions before the Golden Week holidays on October 1 to 7.

Also supporting the optimism, the National Bureau of Statistics’ non-manufacturing Purchasing Managers Index (PMI) in September showed a return to growth but, tempering that, the manufacturing PMI contracted unexpectedly and for the sixth month in a row.

Amid these changes, stock investors have a number of opportunities open to them. “We have witnessed some positive secular trends in China that are worth investors’ attention,” said Zheng Wenli, a portfolio manager of the China Evolution Equity Strategy at investment management firm T Rowe Price.

One such trend is that China is moving up the value chain and this is powering innovation-driven sectors such as internet, biotech and green energy stocks as “innovation has become a critical driving force for the economy and wealth creation”.

Solid macroeconomic conditions should also provide opportunities among discretionary consumption sectors such as automobile and sportswear, as well as renewable energy sectors such as electric vehicle supply chains, wind and solar, noted CEBI Research in its fourth-quarter strategy outlook.

Along similar lines, semiconductor and plays related to 5G implementation have the potential to drive telecommunications, media, and technology (TMT) industries, said Liang Chunyan, an associate at private equity firm Wens (Guangdong) Investment Co Ltd.

“There are still good investment opportunities in the third-generation semiconductor such as silicon carbide chip manufacturing and its applications. Silicon carbide can match the high voltage and high frequency performance requirements of industrial power supplies, new energy vehicles, high-speed rail and other applications, and its replacement of silicon-based is inevitable. Meanwhile, the application of silicon carbide in energy storage and photovoltaic inverters may become a breakthrough to achieve ‘carbon neutrality’,” said Liang.

“Although the construction cost of 5G macro base stations is ‘burning money’ for each operator, it is undeniable that the construction of 5G is part of the national strategy. And 5G-related industries, such as small base stations and optical modules are other good investment opportunities,” said Liang.

There are also likely to be opportunities in services industries, which remain highly fragmented and have been battered over the past 22 months.

While crowded mega-cap stocks may prove to be too expensive, under-discovered leaders in niche and fragmented industries could turn out to be a good opportunity. Over the next few months, these opportunities may be found in China’s fragmented services industries that offer “huge consolidation opportunities for leaders in areas such as hotel chains, property services, and the maintenance, repair and operations industries,” said Zheng.

“In the emerging markets space, regarding China, there could be more upcoming defaults for China’s property developers, which will be under pressure from China Evergrande. With this in mind, stay invested in both advanced and emerging market assets,” said Wang Shengzu, managing director and global head of asset management at stock brokerage firm and investment bank Haitong International. “For equities, they are still the best hedge for rising inflation and for fixed income, move up the asset quality and look for dislocations in the high yield space.”

While markets in the US have risen to record highs over the past year, investors might consider looking elsewhere for returns to close off 2021. The US Federal Reserve is widely expected to begin asset tapering in November 2021, and hike interest rates in July 2022.

“With asset tapering coming in the US, investors might want to focus on EU and Japan. China will also be good thanks to the above-mentioned stimulus, at least temporarily, but long-term prospects are gloomy,” advises Garcia-Herrero.

With the many uncertainties facing both the global economy and global markets, diversification may be an effective defensive posture.

The overall macro backdrop remains supportive for the global market, said Haitong’s Wang.

“Despite supply shortages and weak consumer demand, we still expect the global economy to continue to expand in the fourth quarter of 2021 and it will last for the next 12 months,” Wang said.

There are likely to be significant opportunities across Asian markets as well as other emerging markets as the pandemic recovery continues.

“Currently, the global economic recovery from Covid-19 is only halfway through. However, we continue to expect more progress in vaccine, medicine and reopening of borders,” said Wang.

A global energy crunch that currently spans Asia, Europe and the US is driving up prices of commodities such as gas and coal. The approaching winter season in the northern hemisphere is also likely to drive fuel demand up.

“The energy transition globally is proving more difficult than originally thought since the lack of investment in brown energy is now creating a bottleneck and very elevated prices. This might boomerang in terms of transitioning to green energy,” said Garcia-Herrero.