Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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China update - Economic recovery picks up steam
Redmond Wong
Chief China Strategist
Summary: The official NBS Manufacturing PMI and Non-manufacturing PMI, and the Caixin Manufacturing PMI data released today confirm that the ongoing economic upturn in the Chinese economy is picking up momentum. Chinese consumer and technology stocks are likely to resume the uptrend after spending January consolidating. China’s little giant companies in the A-share market may present opportunities to long-term investors who are looking for participating in growth stocks in niche technology markets.
The surge in China’s PMI surveys signals economic recovery picking up momentum
The headline official National Bureau of Statistics Manufacturing Purchasing Managers Index (NBS Manufacturing PMI) surged to 52.6 in February, the highest level since 2012, from 50.1 in January. The strength was across the board with the Production sub-index and New Orders sub-index improving markedly to 56.7 and 54.1 respectively. When a diffusion index goes above 50, it signals expansion.
The export sector, which has until now been sluggish, showed signs of a strong recovery. The New Export Orders sub-index in the NBS survey unexpectedly surged to 52.4 in February from 46.1 in January and was the first time returning to the expansion territory in 23 months. Caixin Manufacturing PMI, which covers smaller and more private enterprises in the export-oriented coastal region relative to those covered in the NBS survey, also recovered strongly to 51.6 in February from 49.2 in January and the new export orders sub-index in the Caixin survey bounced to 52.2 from 48.7.
The NBS non-manufacturing PMI continued to accelerate well into expansion, rising to 56.3 from 54.4. Both major sub-indices rose further, with the Services sub-index advancing to 55.6 and the Construction sub-index soaring to 60.2.
The surge in the PMI data is the latest confirmation of the economic recovery in the making from the confluence of the reopening from Covid-19 containment and upturns in the credit cycle and the regulatory cycle (normalization and stability instead of tightening), and the emergent tendency of a more conciliatory external policy as noted in our Q1 outlook.
China consumer and technology stocks are likely to benefit from the cyclical upturn
As economic activities, household income and people mobility pick up from the pandemic containment, consumption is set to recover in the coming months. The in-person service industries will probably experience the biggest jump in activities. Technology stocks that operate B2C e-Commerce platforms will benefit from the increase in consumption. In addition, the more relaxed and institutionalized approach of regulation over the tech industries will also remove some of the uncertainty overhangs troubling investor sentiment towards mega-cap China internet stocks. Chinese consumer and technology stocks may benefit from the PMIs today and more incoming economic data that confirm a cyclical upturn is in place in the Chinese economy.
Below is Saxo’s China Consumer and Technology equity theme basket for the inspiration of ideas. They are not stock recommendations and readers are encouraged to do further research into companies listed in the theme basket.
China Little Giant stocks present long-term growth opportunities
While the more established mega-cap technology stocks are likely to benefit most in the near term as the market rallies and investors rush to raise their Chinese equity weighting, in the longer-term, medium-sized innovative companies that have a track record of success in a niche market may present better growth opportunities.
China’s Ministry of Industry and Information Technology has accredited over 9,000 companies with the title of “little giants” according to the following criteria:
- Specialising in a niche sector
- Commanding a high market share in the niche sector
- Demonstrating strong innovative capacity
- Dedicating at least 3% of revenues to research and development
- Minimum 5% p.a. revenue growth of its main business
- Being profitable in the preceding two years
Over 760 of these little giant companies are listed companies, mainly in the A-share market. We have created a China Little Giants equity theme basket which investors can make reference to and potentially, after making their own further research and giving due consideration to the risks associated with smaller private companies operating in China, through the Stock Connect from the Stock Exchange of Hong Kong.
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