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mars 26, 2020

Addressing the Coronavirus Impact: China Equity Portfolio

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mars 26, 2020

Addressing the Coronavirus Impact: China Equity Portfolio

Market Pulse

Addressing the Coronavirus Impact: China Equity Portfolio

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mars 26, 2020


China has been significantly affected by the coronavirus outbreak. The $14tn economy screeched to a halt after the government ordered unprecedented city lockdowns in January in an attempt to contain the spread of COVID-19. Travel bans were enacted, public holidays extended and factories shut down, leading to sudden losses in both economic demand and supply.


The draconian social quarantine measures, while disruptive to the economy, proved effective in containing the virus. The number of daily new cases peaked on February 12, and moderated steadily thereafter. The government started to lift travel restrictions and push for work resumption in mid-February (Figure 1). The actual production recovery, however, has been very slow as people remain wary about the virus threat. As of the third week of March, most economic indicators, such as power consumption, transportation traffic and property transactions, have yet to recover to the same levels in the previous year, and national business resumption rate is estimated to be around 80% (Figure 2). Meanwhile, the deterioration in overseas COVID-19 situation has also cast a shadow on China’s export outlook.

Figure 1: Cumulative Return Rate of People Post Lunar New Year (LNY)

Source: Wind, Baidu, Morgan Stanley Research, as of 20 March 2020

Figure 2: Daily Power Coal Consumption (1st day of Lunar New Year (LNY) = 100)

Source: Wind, Baidu, Morgan Stanley Research, as of 20 March 2020


The economic impact is showing up in the data with both the National Bureau of Statistics of China (NBS) and Caixin Purchasing Managers Index (PMI) for February slumped to record lows, reflecting the abrupt business suspension after the city lockdowns. Hard economic data further affirms the severe shock to the Chinese economy. Industrial production and fixed asset investment growth plunged -13.5% and -24.5%, respectively, on a year-over-year basis in January and February. Street economists have slashed growth forecasts for China, with full-year GDP growth now widely expected to be in a range of 1-3% for 2020, the slowest in more than four decades.

The government has stepped up policy stimulus in the face of the COVID-19 shock and mounting economic pressure. Since January, the People’s Bank of China (PBoC) has cut the Reserve Requirement Ratio twice, and reduced policy rates including LPR, MLF and 7-day reverse repo rates in an effort to bring down financing costs for corporations. The State Council has unveiled a raft of targeted policy measures to support SMEs, including banks’ re-lending and re-discounting, targeted tax cuts, rental cuts and social insurance payment cuts for those most affected by the coronavirus. The government has also boosted special bond issuance for infrastructure investment projects in a bid to shore up the economy.

In the stock market, the Chinese stock market has fared better with the MSCI China A Onshore Index down -12% year-to-date and the broader MSCI China Index down -18% versus MSCI EM Index’s -27% correction through to March 24th. Part of the resilience, in our view, has been driven by China’s loose liquidity stance and local investors’ euphoric sentiment on some segments of the market, such as the technology hardware sector. The information technology sector has been the best-performing sector so far this year despite the broad market sell-off. Healthcare and communication services have also outperformed, while cyclical sectors such as energy, real estate and consumer discretionary lagged. For the China Equity market, healthcare, communication services, information technology and consumers outperformed so far this year, while energy, real estate and utilities are among the most underperformed.

Our China Equity Portfolio have always positioned for sectors and companies with structural growth, strong competitive advantage and balance sheet. We remain overweight consumers, healthcare and Internet, while underweight telecom, energy, utilities and industrials. We overweight consumers sector (both staples and discretionary) as we expect the sector to benefit from China’s rising middle class and secular consumption upgrade trend. Leading companies in the sector are set to gain market share and improve profitability through industry consolidation and product premiumization. The sector is also less vulnerable to the broader economic cycles. We like the healthcare sector given not only China’s huge medical demand amid population ageing but also the government’s favorable policy towards production innovation. We believe domestic companies with strong R&D capability and product pipelines will benefit from the policy and consolidate the fragmented market. We also selectively position in the technology sector as China moves up the value chain and becomes more innovative in areas such as 5G technology and semiconductors. Moreover, trade tensions and geopolitical risks are also prompting a wave of supply chain localization in the technology space, presenting growth opportunities for Chinese hardware makers.

The government has also been proactive in maintaining financial market stability. The China Securities Regulatory Commission suspended short selling and night session futures trading, and urged major domestic brokers to strictly control their securities margin lending business. Share pledge contracts were also allowed to be extended by as long as six months in order to prevent margin calls. The PBoC has also injected short-term liquidity in a timely manner. These measures may have helped alleviate selling pressure and discourage panic deleveraging and a credit crunch.

Looking forward, given the severe economic impact of COVID-19, we expect corporate earnings expectations will need to be revised down significantly, which may not be properly factored in by the market currently.

Overall, given the wide range of macro uncertainties and challenges, we will continue to have overweight positions in sectors and high quality stocks that are less sensitive to global and domestic macro risks. In our view, the on-shore and off-shore China markets continue to offer exposure to a wide breadth of companies and sectors not readily available elsewhere.



There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in this Portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equity securities' values also fluctuate in response to activities specific to a company. Investments in securities of Chinese issuers, including A-shares, H-shares, B-shares and red chip shares, involve risks and special considerations not typically associated with investments in the U.S. securities markets or foreign developed markets, such as heightened market, political and liquidity risk. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than the risks generally associated with investments in foreign developed countries. By investing in investment company securities, the portfolio is subject to the underlying risks of that investment company's portfolio securities. In addition to the Portfolio's fees and expenses, the Portfolio generally would bear its share of the investment company's fees and expenses. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.


The Caixin Manufacturing Purchasing Managers' Index (PMI) measures the performance of the Chinese manufacturing sector and is derived from a survey of private industrial companies.

The MSCI China A Onshore Index is a free float-adjusted market capitalization index that captures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges.

The MSCI China Index captures large and mid-cap representation across China A-shares, B-shares, H-shares, Red-chips and P-chips. It reflects the Mainland China and Hong Kong opportunity set from an international investor’s perspective.

The MSCI Emerging Markets Index (MSCI EM) is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of emerging markets.


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