A shortage of quality assets and the entry of new players in the form of Chinese insurance firms and pension funds could provide support for the mainland’s A–share markets this year.
That said, the upside may remain capped as a number of risk factors remain in play, keeping in check the overall investment appetite.
Yuan depreciation is one of the major risks. The ending of the global low-interest rate environment and the deleveraging process of China’s financial sector are also negative factors.
On the positive side, some investors may opt to switch to equities as the government tries to curb property speculation.
Cross-border stock trading links with Hong Kong, meanwhile, will help bring in some money from international investors.
There are a few sectors that investors should focus on.
In general, stocks related to themes like reform of state-owned enterprises, public-private partnership, Belt and Road, consumption upgrade and new-economy will be most interesting.
Mainland investors also tend to pick companies that display consistent growth while trading at low valuation and offering high dividend yield.
That should boost the appeal of some firms in sectors such as toll roads, electricity, and appliance manufacturing.
Inflation could pick up in 2017, and consumer goods may enjoy stronger pricing power. Given this, Chinese liquor producers, auto makers and retailers stand to gain.
Among other businesses, an aging population would benefit the nursing industry.
Elsewhere, the dairy sector will benefit from industry consolidation and the second-child policy. The pharmaceutical industry will have plenty of room for growth due to robust demand and healthcare reform.
The financial sector is also a sweet spot.
Low valuations and opportunities from debt-to-equity swap initiatives and China’s stock connect schemes with Hong Kong can bring higher profitability to asset management firms, banks and brokerages.
This article appeared in the Hong Kong Economic Journal on Jan. 9
Translation by Julie Zhu
[Chinese version 中文版]
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