2020 has kicked off with a fairly positive backdrop for domestic equity markets including the soon-to-be-signed US-China phase one trade agreement, more monetary stimulus from the PBOC, and indicators pointing to stabilisation of Chinese economic growth. However, volatility will likely remain in play given potential economic and political obstacles to a more comprehensive US-China trade deal, and also uncertainty in the build-up to the US presidential election.
Against this backdrop, we observe that domestically focused Chinese firms are better insulated from a possible deterioration in trade relations or global growth. China's huge domestic economy will remain well supported by rising wealth and consumption as well as targeted monetary and fiscal stimuli.
The spending power of China's fast-growing middle classes will continue to drive local company revenues and profits. This translates into investment opportunities. We see continued growth in the high-end food and liquor, travel, health care and life insurance sectors. With an overall robust company earnings outlook , A-share valuations appear relatively attractive too.
Our strategy is to be selective, and holding quality companies that have strong balance sheets, good governance and that are set to benefit from structural trends such as the broadening of domestic consumption. We believe they will be the winners over the long term.
In addition, we think the inclusion of A-shares into global benchmark indices will help to institutionalise the onshore domestic market, improving governance standards and acting as a tailwind for foreign investment into Chinese stocks. Well-run companies with good capital management should outperform over time.
Nicholas Yeo is head of China Equities at Aberdeen Standard Investments and manager of the $3.2bn Aberdeen Standard Sicav I - China A Share Equity fund