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Sniffing out investments in the Year of the Rat

26 January 2020

In the Chinese zodiac, rats can be characterised as cautious savers. But Nicholas Yeo, head of China Equities, Aberdeen Standard Investments predict the year ahead will be more about spending and opportunities for beady-eyed investors with a nose for a good deal.

Most commentators are predicting a period of consolidation for China’s A-share market following a year of stellar gains.

The A-share market rebounded more than 30% over the past 12 months, which encompassed the Year of the Pig in the Chinese zodiac. Fittingly, pigs are symbols of wealth and prosperity.

This year, 25 January is the start of the Year of the Rat. First among the zodiac animals, rats are depicted as clever and cautious when it comes to finances. They look to save what they have, which might seem appropriate given the piggy excesses of the previous year.

However, there is a structural economic reason to believe that the Year of the Rat will more about spending than saving, both by Chinese consumers and potentially the government.

Policymakers are committed to raising China’s urbanisation ratio from 60% to 80%  – the level of advanced economies. The more urban a population is, the wealthier it becomes. Shanghai’s GDP per capita stands at $20,000, against a national average of $7,500.

Evidently Chinese people are getting wealthier. A decade ago, just 8% of the population enjoyed annual household income above Rmb138,000 (approximately £15,500). That figure has since risen to 49%.

Increasingly wealthy Chinese, in particular, a fast-growing band of middle-class millennials who earn and spend more than their parents ever did are driving domestic consumption.

For example, it is estimated that Chinese tourists will make 160 million outbound trips from the country in 2020. That’s equivalent to the entire Russian population on the move. Add in domestic travel and the figure rises closer to 500 million. That promises to have knock-on benefits for segments such as airport operators and duty-free shops.

Rising levels of wealth have also set in train a ‘premiumisation’ trend in China, with premium brands enjoying faster growth than lower-end peers. Demand is so strong for high-end Chinese liquor Baiju, for example, that supplies are reportedly running short.

Moreover, rising disposable incomes are spurring demand for health-care products as well as wealth management services and insurance. We expect these factors to throw up diverse investment opportunities in the Year of the Rat.

We might also see more policy action from the government. Last year officials loosened restrictions on residency rights in all but the largest cities and promoted public services for all permanent residents.

This should make it easier for migrant workers and their families to relocate, driving up China’s urbanisation ratio and supporting consumption. People gravitate to cities to find better jobs, health and education services.

We may see the government speed up its pace of reform this year by prioritising fiscal stimulus. It is already developing urban centres, such as the Greater Bay area linking cities in southern China. It could accelerate this process, on the understanding that the best insurance against global uncertainties is to bolster the domestic economy.

In short, we see potential for investor upside in Year of the Rat. While rats are depicted as cautious, they are also portrayed as adaptable, instinctive and picky.

Being picky will serve investors well in the year ahead. We favour well-run industry leaders with strong balance sheets. They will be best placed to grow market share at the expense of weaker rivals.

Investors can also still pick up good companies at a reasonable value. Average earnings growth for A-shares is expected to be 15-20% this year, based on consensus forecasts.

Ultimately we’re confident it will be spending, not saving, that will define Year of the Rat. Beady-eyed investors with a nose for an opportunity should be able to take advantage.

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