May was an eventful month on the macro front for China equities. The U.S.-China trade dispute took a turn for the worst after the Trump administration lifted tariffs on Chinese imports. Hopes of the two sides striking a deal to end the ongoing trade spat were further dashed by the blacklisting of Huawei Technologies by U.S. authorities. The unexpected developments saw volatility spike across global markets.
The latest twist in the ongoing U.S.-China trade spat has sparked concerns among investors about the potential damages that a drawn-out dispute could do to China’s economic recovery. Investors also worry about the possibility of the world’s second largest economy suffering a “double-dip recession.” The portfolio manager estimates that if the worst-case scenario of the U.S. imposing a 25% tariff on US$540 billion of Chinese imports plays out then China’s year-on-year GDP growth rate could slow to 5.5%1 from 6.4%2 in the first quarter of this year. Albeit a noticeable slowdown, a 5.5% growth rate is still well above that of developed economies. Additionally, further fine-tuning of policy by Chinese authorities could help to cushion external headwinds to a certain extent.
Amidst the rising trade pressure, China’s macro data started to weaken again entering the second quarter, with its closely-watched manufacturing Purchasing Managers’ Index (PMI) fell below the critical 50 level in May3. We believe the Chinese authorities would continue its flexible policy approach, and has no hesitation to step up its supportive policies further to combat the macro headwind.
In view of the rising macro uncertainties in May, we have turned more conservative and switched to buy stocks with more defensive nature, such as the consumer staples and utility sectors. We continues to like the fast data transfer theme as the it is believed both mobile and fixed-line networks globally needs to be upgraded to tailor for the future technology demand of AI, the Internet of things, and big data analysis.
- Source: Value Partners, 8 May 2019
- Source: National Bureau of Statistics of China, 17 April 2019
- Source: National Bureau of Statistics of China, 31 May 2019
The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.