As China continues its economic restructuring efforts, here are six investment themes for 2016:
1. Insurance stocks
Chinese insurers have enjoyed rapid growth in recent years, but the insurance penetration ratio in the country is still very low. Total insurance spending in 2014 was only half of the world’s average last year. There is vast growth potential.
Also, Chinese householders will move more money into insurance products in light of continued decline in interest rates. Valuations of Chinese insurance firms have become attractive again after a correction last year. Investors should keep a close eye on leading insurance companies.
2. High-dividend plays
Interest rate cuts will be key theme in China this year. The central bank is likely to remain dovish for next 3 to 5 years given persistent deflationary pressure and sluggish economy. High-dividend A-share firms are more attractive given the poor bank interest rates and low-inflation environment. Among various options, home appliance manufacturers are good targets due to their low P/E multiples, low debt ratios and large cash piles.
3. Policy-driven counters
Beijing has highlighted the “One Belt One Road” strategy in the Central Economic Work Conference held in late December. The government intends to divert excess capacity into countries along the trade routes and connect Europe, Asia and the Middle East through infrastructure investment. The push is set to benefit railway firms and other infrastructure-related counters.
Meanwhile, environmental protection will be a top priority for the government under the 13th Five-year Plan. Public utilities firms will benefit from government support as there will be more sewage treatment and other related initiatives within this year.
By 2035, China’s old-age ratio is expected to reach 28.7 percent. An aging population would provide long-term growth momentum for the pharmaceutical industry. However, investors should select their targets carefully. We prefer big players with strong R&D capability and patented drugs. These firms are likely to outperform amid intensifying competition.
5. A-H share price gap
China’s securities regulator has vowed to further open up the nation’s capital markets and launch the Shenzhen-Hong Kong Stock Connect program within this year. Amid such initiatives, the price gap in dual-listed stocks is likely to contract further. Currently, H-shares listed in Hong Kong have an average discount of 40 percent compared to their A-share counterparts on the mainland. We believe the price gap will close over three to five years.
6. China consumption stocks
The Chinese government aims to stimulate domestic demand to shore up the overall economy. That will become a catalyst for consumer-related firms. We prefer home appliances firms, Chinese spirits makers and sportswear manufacturers, among other consumption plays.
This article appeared in the Hong Kong Economic Journal on Jan. 6.
Translation by Julie Zhu
[Chinese version 中文版]
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