China’s long-term prospects and catalysts

MarsYu

Dina Ting, CFA, Head of Global Index Portfolio Management, Franklin Templeton Exchange-Traded Funds

China’s stock market has had a volatile year, but Dina Ting, head of global index portfolio management, Franklin Templeton Exchange-Traded Funds, finds reason for optimism over the long term.

Key points to remember

  • China’s official August retail sales and industrial production figures beat consensus expectations – a potential indicator of improving consumer willingness to spend.
  • Online sales of physical goods in August rose 5.8% from a year ago, eclipsing growth rates in every month since March.1 We believe this may bode well for the upcoming China Singles Day, for which sales numbers have been rising every year for over a decade.
  • Unlike most other major central banks, the People’s Bank of China recently cut its key rates to help struggling property developers with outstanding loans. At the end of September, the yield spread between the benchmark 10-year US Treasury note and its Chinese counterpart stood at the highest level since 2007.2

Will Singles Day sales provide an economic spark?

In case you want to mark your calendars, the mid-October pre-sale campaigns to kick off the world’s biggest online shopping spree known as Singles Day are just weeks away. Think of it as something of a pre-party to China’s annual November consumer event that included appearances and live-streamed performances by global celebrities like actress Nicole Kidman and fashion designer Diane Von Furstenberg. It’s a boost that many retailers in China badly need now, as sales have been hit by COVID-19 lockdowns and falling consumer confidence levels.

But Chinese retailers aren’t the only ones facing challenges. Big brands like NIKE (NKE) and Lululemon (LULU) have seen notable inventory builds this year while others continue to face supply chain issues – making it easy to see why a second” Amazon Prime Day” 2022 is scheduled for this fall. But not all data is dire. China’s official retail sales and industrial production figures for August beat consensus expectations. Online sales of physical goods for the month rose 5.8% from a year ago, eclipsing the growth rates for every month since March.3

Last year, despite slowing growth resulting from sweeping crackdowns, the nation’s largest online retailer reached more than US$84 billion in gross merchandise volume (calculated on the basis of gross sales, excluding count discounts or returns), an increase of more than 8% over the previous year.4 In fact, Singles Day sales numbers have actually increased every year since the “11.11” (November 11) holiday began gaining traction nearly two decades ago.

China's Online Retail Sales for Singles' Day Steadily Rise

Certainly, the short-term problems plaguing the Chinese economy loom large. Overall economic growth has slowed, escalating war tensions in Ukraine continue to plague markets everywhere, and China’s real estate sector continues to slow. Housing construction in China, now down 25%, represents a decline nearly double that of Japan in the decade following its crash of the late 1980s.5 In 1990, Japan’s gross domestic product per capita was about 80% of that of the United States. China is currently around 28%6 suggesting to us that there is ample room for catch-up growth.

But the central government is allowing many municipalities to relax a range of local restrictions on new home purchases. And unlike most other major central banks, the People’s Bank of China recently cut policy rates (more than once) to help struggling property developers with outstanding loans. By comparison, US 10-year Treasury yields are now higher than China’s for the first time in more than a decade.seven

Reasons for longer-term optimism

No one knows when China’s zero-COVID measures may be adjusted enough to support a strong economic recovery. But going forward, some Chinese observers expect the government to try to ease mobility restrictions with tighter, localized lockdowns for COVID-19 cases, rather than continuing to impose lockdowns across the country. city ​​scale. In mid-September, the government ended the lockdown of Chinese megacity Chengdu after two weeks, which was far less restrictive than the two-month lockdown Shanghai residents endured earlier this year. Chinese leaders are expected to gather in Beijing on October 16 for the important meeting of the National Party Congress which will take place twice a decade. The rally is of particular significance because it has also become a widely watched signal of when China might start easing its zero COVID policy.

The strength of the US dollar against all major currencies, including the Chinese yuan, could also help make Chinese goods cheaper for overseas buyers, which could be important for such an export heavyweight. Recent data showed that the country’s industrial production also remained resilient, and China accounted for 25% of global economic growth last year.8 Additionally, a preliminary report by the International Federation of Robotics shows that China’s industrial robotics market has seen strong growth with installations in 2021 up 44% from the previous year.9

Contribution to global gross domestic product growth

Party leaders launched a number of “shared prosperity” policies in 2021, including measures to improve clean energy, increase efficiency and reduce emissions. The campaign has been described as a transformational new path for China’s development. It should be noted that the world’s second-largest economy now generates more renewable electricity than Europe, and pent-up demand for electric vehicles has also been supported by government incentives.

For investors looking for a market with access to companies leading the development of 5G networks, China is a known hotspot. The government has prioritized policies to support widespread deployment of public and private 5G networks, which should boost demand for chips during a period when China’s semiconductor industry is booming.

What are the risks ?

All investments involve risk, including possible loss of capital. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. There are particular risks associated with investing in foreign securities, including risks associated with political and economic developments, business practices, availability of information, limited markets and exchange rate fluctuations and policies; investments in emerging markets involve increased risks related to the same factors. Investments in fast-growing sectors such as the technology and healthcare sectors (which have historically been volatile) could lead to increased price fluctuation, particularly in the short term, due to the rapid pace of change and the product development and changes in governmental business regulations. emphasizing scientific or technological advances or the regulatory approval of new drugs and medical devices. China can be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks specific to China, including certain legal, regulatory, political and economic risks.

Any companies and/or case studies referenced herein are used for illustrative purposes only; any investment may or may not be currently held by a portfolio advised by Franklin Templeton. The information provided does not constitute an individual investment recommendation or advice for any particular security, strategy or investment product and is not an indication of the trading intent of any portfolio managed by Franklin Templeton.

1 Sources: Bloomberg, China National Statistics.

2 Sources: FactSet, Tullet Prebon Information, People’s Bank of China, United States Department of Treasury, September 22, 2022

3 Sources: Bloomberg, National Bureau of Statistics of China.

4 Source: Forbes, “China Singles Day 2021: Three Questions Answered,” November 15, 2021.

5 Source: Shu, Chang, “CHINA INSIGHT: 25% Drop Needed to End Real Estate Overstocking”, Bloomberg Economics.

6 Source: World Bank, most recent data as of 2021.

seven Sources: FactSet, Tullet Prebon Information, People’s Bank of China, United States Department of Treasury, September 22, 2022.

8 Sources: China Securities Journal, September 15, 2022; Bloomberg, National Bureau of Statistics of China.

9 Source: International Federation of Robotics, data from 2021.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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