Economy set for 'stable growth' this year
China’s economy is likely to experience stable growth this year, although continuing deleveraging efforts, regulatory tightening and subsequent liquidity concerns are the key challenges, says investment management services firm Fidelity International.
The stock market recorded one of its longest rising runs as it entered 2018, leading investors to the question whether the momentum can be sustained or whether a decline is due.
“The A-share market (shares listed on the Chinese mainland) hit the bottom in 2016 and since then it has experienced a continuous rebound. I believe the trend is likely to last in 2018, as valuation is still attractive in global content,” said Lynda Zhou, Fidelity’s equity portfolio manager.
She said that China’s ongoing supply-side reform will benefit cyclical sectors such as coal, steel and cement by fostering a more robust market with a better supply-demand balance.
In terms of sectors, a number of domestic brands in the automobile and home appliance industries have grabbed market share from foreign players in recent years. “Domestic automobile brands captured 40 percent of market share in China in 2017, compared to the 20 percent back in 2003,” Zhou said.
Also, high-end manufacturing is a market set to expand, as China is leading the way in surveillance and communication technology industries.
“China is on track to further accelerate innovation over the long term. All of these driving forces will propel the economic growth in 2018 and beyond,” Zhou said.
Corporate earnings are expected to remain strong this year despite an expected slowdown compared with 2017.
The overall valuation for A-shares is still below the global average, which is a chance for investors, while some overpriced stocks with high growth can expect a correction that will lead to additional market volatility.
As for the bond market, Freddy Wong, Fidelity’s fixed income portfolio manager, believes the authorities will step up further on regulatory tightening.
He added that inflation and the expected looming interest rate rise by the central bank can bring additional risks that might also drive the yield curve upward.
“Banking, property, consumer and infrastructure will be the major sectors dominating China’s bond market,” Wong said.