23 February 2019
Consumption-related firms and clean-energy players are expected to do well in China in the coming year. Photo: CNSA
Consumption-related firms and clean-energy players are expected to do well in China in the coming year. Photo: CNSA

Consumer and new-energy plays to remain hot in Year of Sheep

As the Chinese prepare to usher in the Year of the Sheep next month, what do the markets have in store for us? And what should investors need to bear in mind in the coming year?

Well, broadly speaking one should keep a close eye on the changing policy environment, which will keep the markets volatile. The European Central Bank has launched monetary easing, and the US is very likely to hike its key interest rate in mid-2015.

Closer home, China’s economic growth looks set to moderate amid economic restructuring. Therefore, the sectors that enjoy steady and rigid demand should find favor. For example, the consumer sector, led by pharmaceuticals, food and beverage plays, has already attracted some long-term investors.

Listed companies will continue to suffer pressure in earnings due to economic slowdown. A number of industries will grapple with excessive supply and insufficient demand. In this situation, consumer-related companies are set to outperform.

However, sectors like automobiles and property look less attractive due to their close link with the economic cycle. 

Meanwhile, the so-called “One Belt, One Road” strategy, which centers around infrastructure construction as authorities strive to achieve mutual access and linkage in the Asia Pacific region, deserves a closer look.

The strategy intends to fully utilize China’s edge in infrastructure sector and help the neighboring nations build railways, roads, etc. Such initiative will help unleash huge growth potential in these developing nations, and also open up vast market for the Chinese infrastructure industry.

The move will help generate fresh demand to absorb the nation’s excessive capacity and mitigate negative impact from Beijing’s push toward a more sustainable growth model. It will also offset the pain involved in economic restructuring and help utilize the nation’s massive foreign exchange reserves amid the push for renminbi internalization.

In addition, free-trade zones (FTZ) will be another hot topic this year. The establishment of an FTZ in Beijing-Tianjin-Hebei region will help accelerate various sectors including transport and environment protection.

The State Council has enlarged the area of the Shanghai FTZ and approved another three such zones in Guangdong, Tianjin and Fujian. The swift move came in response to the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership (TTIP) initiated by the US.

The move will open up the Chinese market wider to global players, helping the nation tackle the bottleneck of the existing export-driven economy. And the FTZs will help enhance the nation’s global trade and benefit the broader strategy of economic restructuring.

Clean energy will be another interesting sector given the nation’s enormous market. The government has stepped up efforts in combating pollution since October 2014 as many parts of North China were hit by heavy smog.

The National Development and Reform Commission, the Ministry of Environmental Protection and the National Energy Administration have jointly released an Action Plan for the Transformation and Upgrading of Coal Power Energy Conservation and Emission Reduction (2014- 2020).

Under the plan, the eastern and central regions will reduce the emissions of their coal-fired power generating units to be in line with those of gas-fired plants.

The plan has prompted power generators to upgrade their facilities and reduce emissions. Moreover, more efficient and cleaner generating units will enjoy priority under the nation’s electric power system reform and on-grid tariff restructuring.

These measures will be critical for the bottom line of power plants as they grapple with slowing growth in power demand.

This article appeared In the Hong Kong Economic Journal on Jan. 26.

Translation by Julie Zhu

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Senior investment banker

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