Foreign investors will continue to be drawn to Chinese equities, which have seen inflows on a steady rise in recent months, as they seek exposure to the renminbi’s appreciation as well as China’s economic growth, according to Fidelity International.
Although China’s “first in, first out” recovery from the economic fallout of the global pandemic would be expected to help sustain bullish market sentiment until the spring, investors should be alert of high volatility and sharp divergence in performance between sector.
“In our view, some valuations already look stretched in sectors like technology, consumer and healthcare, where more crowded trades may result in wider price swings. On the other hand, many large financial stocks remain laggards, trading at single-digit earnings multiples or discounts to book value,” the firm said in the market commentary.
“Of course, past performance is not a reliable indicator of future results. But as the new ox year kicks off on Feb. 12, several factors will be front of mind for investors eyeing China’s markets.”
Performance of funds with exposure to China since February, 2020 to the end of December 2020
Source: FE Analytics
According to Fidelity, investors should be particularly cautious in sectors where valuation multiples had rapidly ballooned as one of the key risks would be faster-than-expected policy tightening.
“As the recovery continues and inflationary pressure builds up, China may become the first country to need to mop up liquidity,” the firm said.
“Concerns over tightening caused market jitters in late January. There may yet be more small tightening steps to cool inflation or limit asset bubbles. Nevertheless, we expect any further normalisation of monetary policy to be slow and gradual, as the central bank takes care to maintain market stability in what China hopes will be an otherwise auspicious year.
Performance of Shanghai Stock Exchange Composite index versus S&P 500 between February, 2020 and December, 2020
Source: FE Analytics