A BREATH OF FRESH AIR FROM CHINA: WHAT TOMORROW'S CHAMPIONS ARE?

Posted 05 August, 2020

The Chinese economy is on the way back to normal. As China is the second largest economy in the world, the country's economic progress in the next twelve months will also play a key role in restarting the global economy. Equity portfolio manager Chris Thomsen and economist Stephen Green, both at Capital Group, give an outlook on the recovery of the Chinese economy and explain which companies have long-term growth potential.

 

Growth likely until 2021

 

"I think the return to growth will be slow and gradual," said Stephen Green, an economist at Capital Group. Although industrial production is largely back to normal levels, industrial profits are still weak and exports could decline by 20 to 30 percent compared to the previous year. In general, consumption is lagging behind due to high unemployment and concerns about possible wage cuts.

The expert also assumes that the Chinese economy will experience no or slightly negative growth in 2020. "Our research suggests that China's economy contracted significantly more in the first quarter than the government officially announced at 6.8 percent," said Green. "Given the fiscal incentives that will be pumped into the economy, we expect growth to start in 2021." Economic stimulus measures are likely to shift in favor of technology-related infrastructure instead of focusing on real estate or lending to state-owned companies. China hopes to gain more self-sufficiency in the long term.

 

Path to economic independence in some sectors

 

"The outbreak of the corona virus has exposed the capabilities of some companies that could potentially become the next group of domestic champions in the technology and healthcare sectors," said Chris Thomsen, portfolio manager at Capital Group. The innovative, domestic companies should benefit from the emerging trend of localization or the procurement of goods and services from China. This development has arisen in part from the distortion of supply chains and structural trade issues. In the semiconductor sector, China is pursuing the plan to become economically independent. This could benefit Silergy, for example, which is increasingly gaining market share in the Chinese analog chip market and, according to forecasts, the demand for 5G and cloud computing applications will increase sharply.

In the healthcare sector, there are also a few biotechnology companies that have been at the forefront of developing a vaccine against COVID-19. "The aging population and the demand for high quality private hospital services may also offer interesting investment opportunities in the coming years," said Thomson.

 

Identify long-term trends

 

According to the experts, it is currently particularly important for investments to keep an eye on long-term trends and investment opportunities - even if there is currently a strong political rhetoric and increased geopolitical tensions. In China there are many innovative companies with large target markets. These would bring the potential for significant long-term growth in their market values. However, stock selection is of considerable importance for investors, since the global business environment is changing quickly and is uncertain. In addition, the quality of Chinese companies varies greatly, depending on the sector in which they are based and the level of maturity they are at.

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