China recovery on track
Economic recovery accelerates
Although the pandemic continues to have a major impact on the global economy, a positive outlook is still in place for China. On-track recovery also remains, despite the diverging sector performance amid the new norms of the pandemic. China’s accommodating policies (e.g., increased fiscal support and quantitative easing) have also been successful, whereby the results of 2Q2020 have proven that the earnings trough is behind us. For the first time since January 2020, we have started to see more upgrades than downgrades, and MSCI China EPS is expecting a significant rebound from -15.6% in the 1H to +27% in the 2H1. We might also see further upgrades as economic recovery accelerates.
China showcasing ahead of the curve recovery
Moreover, the latest dovish signal from the Federal Reserve has added fuel to the equity market, as there will no longer be pre-emptive tightening under the Fed’s current policy stance. As mentioned by Jackson Hole in early September, the Fed now has a greater tolerance to inflation. This is also indicated by the weakening trend of the US Dollar, which has historically been positive for emerging market equity. China is showcasing ahead of the curve recovery, and is expected to continue to attract capital flows under the massive global liquidity backdrop.
Our focusing sectors
We have been focusing on companies and sectors that are domestically driven, which have been paying off reasonably well, as they have been less disrupted by the pandemic. Such areas include consumption upgrades, Internet/e-commerce, education, and healthcare. Covid-19 will undoubtedly have a lasting impact on how global markets operate in the future, particularly for e-commerce, the Internet, and IoT. For instance, due to the pandemic, online shopping has become mainstream among the general population, in addition to tech and internet sectors becoming leaders in terms of earnings turnaround. Overall, the market has been accurate at predicting the success of certain sectors, which is why we are seeing performance divergence. With this in mind, we feel that some sectors will be hit harder, such as retailers, landlords, utilities and banks.
- Source: Jefferies, FactSet
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