Posted on Oct 15, 2020 at 4:14 PM
Chinese equity markets are on cloud nine. Since the start of the year, they have been among the best performances of the major world stock markets. All Chinese listed companies are now worth more than $ 10,000 billion, surpassing the record for the summer 2015 bubble. This time, the fundamentals appear much healthier: the economic recovery is solid and the coronavirus epidemic appears under control.
The performance of Chinese indices is enough to make many investors green with envy. The Shenzhen Composite is up 32% over the year, and the Shanghai Composite by 9%. Together, they represent more than two thirds of the Chinese market. The more concentrated CSI 300 climbed 17%. The index of start-ups and other growth stocks, the ChiNext, for its part jumped 52%.
Economy in remission
Chinese markets have greatly benefited from the authorities’ response to Covid. China was the first to be hit and the largest country to keep the epidemic under control. A dynamic recognized by investors. In the United States, the S&P 500 has climbed only almost 8% since January, while in Europe, the pan-European EuroStoxx 600 index remains down by more than 12%.
The Chinese economy is already in remission. China is expected to be the only major country to post positive growth in 2020. The IMF expects GDP to grow 1.9% this year and 8.2% next year. Overall growth is expected to drop 4.4% in 2020 before rebounding 5.2% in 2021.
Investors have realized the importance of China. The weight of the country is doomed to grow in the major world indices. Chinese equities represent 42% of the MSCI Emerging Index, up from 17% 10 years ago, even though they are still weighted at 20% of their free float. The better integration of Chinese equities with global indices has already enabled them to significantly reduce the valuation gap compared to other emerging markets.
But Chinese companies are not immune to unpleasant surprises. More and more of them are being targeted by the US administration. An “idiosyncratic” risk, which affects only a few stocks, however, say Societe Generale analysts. For affected companies, US sanctions can be devastating. Huawei is considering selling its Honor smartphone brand to escape the American yoke. A technique already implemented by ByteDance for its social video network TikTok.
For reassurance, investors can relate to Tencent’s journey. Its subsidiary WeChat is also threatened with a ban by the United States, a decision now suspended by the courts. Not enough to disturb the course of Chinese society, which remains up more than 45% since the start of the year. Close to its historic record, its capitalization reached $ 683 million.