There has been a disconnect between sentiment and fundamentals when it comes to Chinese equities in 2018. Market sentiment has been weak (driven by the changing relationship with the US and moderating growth), while economic fundmentals remained decent. China was on track to deliver its growth target despite moderation, widely known as a result of economic transitioning towards high quality growth.
Looking into 2019, our view on Chinese equities remains the same: We believe they represent some of the best structural opportunities across global markets, and the risk-reward is attractive now given:
Economic growth to remain stable in 2019
The Chinese economy continued its steady expansion in 2018 with gross domestic product (GDP) growth well on track to achieve the government’s target of around 6.5%. We expect the economy to remain stable in 2019. China aspires to become a moderately prosperous society by 2020, with GDP doubling from its 2010 level. We believe China will set an appropriate growth target that will allow it to stick to its plan.
We expect consumption and services to keep gaining importance in driving economic growth thanks to rising income and growing household wealth. In the first three quarters of 2018, 78% of GDP growth was driven by consumption compared with 64% during the same period in 2017. ¹
We believe there remain structural needs for fixed asset investment, particularly infrastructure investment in China. We believe investors should bear in mind that even though China has made tremendous improvement, it still lags behind its developed peers on infrastructure as a developing country.
We expect the trade sector to face macro headwinds due to moderating global growth and rising tariffs, but we expect the impact to be limited as its contribution to GDP growth has been low in recent years.
1 Source: JP Morgan research.
2 Source: Citi Research.