The overall Chinese market had a solid performance in 2017. MSCI China index rose 52.3 percent in 2017, far outperforming Shanghai A-shares’ 6.6 percent rise. In terms of valuation, the MSCI index is now trading at 12-month forward price-to-earnings (PE) of 14.1 times. This is the highest since late-2009 and early-2010 when the economy was emerging from the global financial crisis low. In 2018, UOBKH foresees two key threats that will affect the equities outlook in China, i.e. rising interest rates and funds outflow from emerging markets.

To help investors navigate the Chinese market, UOBKH has picked its preferred sectors to invest in and the related investment themes to consider. Among the universe of Chinese sectors, UOBKH picked out metals, steel, education, home appliances, sportswear, consumer staples, banking, healthcare and e-commerce as sectors to watch out for in 2018.

Investors Takeaway: 3 Investment themes To Consider

Mass-Market Consumption

Retail sales will remain a key growth driver for China in 2018. In addition, the government’s push for equitable growth will drive gradual improvement to disposable income, continued consumption upgrade and increasing demand for services. UOBKH foresees consumption stocks like Anta, Gree, Mengniu Dairy and Shenzhen Airport to be key beneficiaries.

Another segment that UOBKH has a positive outlook on is the online gaming and e-commerce segment. While the sector is already trading at rather rich valuations, the sector will benefit from the broadening of consumption growth and better margins and strong cash positions. Among the Internet names, UOBKH prefers Alibaba.

Supply-side reform and environmental protection

As part of the government’s promise to improve quality of life, both policies have been working towards the reduction of pollution emission from traditional industries. The first form of reduction is via shutting down of outdated capacity and overall reduction of production. Among the various base metals, UOBKH is positive on copper and steel.  Among the mining stocks, UOBKH’s preferred picks are Baosteel and Zijin.

Policy Beneficiaries

  • Healthcare

The healthcare sector is a medium to long-term positive as China’s demographics shift towards an older population. The increasing wealth among Chinese also drives demand for better and higher quality healthcare services. UOBKH also notes that the lift from China’s new National Reimbursement Drug List will make its full impact in 2018. Accelerated drug approvals and the ongoing push for TCM will be additional growth drivers for the sector. UOBKH recommends CSPC and China TCM as its top pick in the sector.

  • Banking

The Chinese Central Bank has been undertaking measures to contain shadow banking and reducing risk weighting for debt-equity swap projects and distressed assets bought from financial institutions to encourage disposal of non-performing assets. UOBKH views the reduction of systematic risk as a positive for the banking sector. Among the banking stocks, UOBKH’s preferred pick is China Construction Bank for its strong franchise in retail banking.

Stay tune for the detailed analysis of UOBKH’s top stock picks

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