A global fund manager has predicted the Chinese Year of the Ox will deliver positive outcomes with regard to investment in the Chinese stock market.
Fidelity International has made this forecast on the back of the economic recovery China is currently experiencing, boosted by investor confidence triggered by cheap credit.
“China’s was the only major economy with positive growth in 2020 and consensus forecasts for this year project GDP (gross domestic product) rising about 8 per cent. Analysts also expect robust earnings growth for Chinese companies at least in the first two quarters,” Fidelity said.
However, the manager warned investors to expect continued levels of high volatility in China’s market as well a significant contrast in the performance of different industrial sectors.
“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,” it said.
“Structural growth themes will likely reign this year, with certain hot sectors and industry leaders dominating the show. Domestic consumption should continue to shine as Chinese policymakers seek to boost internal demand in the face of ongoing trade tensions with Washington.”
While inflows for Chinese equities have been increasing in recent months, Fidelity is suggesting investors exercise caution in some sectors that have performed well recently and has advised them to be mindful of the likelihood of restrictive fiscal measures being introduced to counter any inflationary impact from the economic recovery.
“We see more cause for caution in sectors where valuation multiples have rapidly ballooned. One key risk is 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,” it noted.
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