2018 was a year of risk escalation for the market. In China, both MSCI China and CSI 300 had multiple de-ratings that were one of the worst in history. But here’s the good news. DB thinks that the market has passed policy and liquidity bottoms. An equity bottom is likely to occur, based on historical cycles.
With the current low valuation, further decline in economic growth and a failure to reach a trade deal appears to be priced in. Heading into 2019, Deutsche Bank is positive on the Chinese equity market with an end-of-year return target of 16-20 percent for the market. For investors looking to capitalize on the growth in the Chinese market, here are five key ideas you need to know.
Investors Takeaway: 5 Key Ideas In The Chinese Stock Market By Deutsche Bank (DB)
- GARP Is Back
In 2019, DB is confident that the GARP investment theme will stay relevant in the market. This is thanks to China’s continuing pursuit of a better quality of growth. That being said, cyclical headwinds and market noise can cause some near term volatility for the GARP investment theme.
Under its GARP investment theme, DB recommends investing in four key areas: Green environment, advanced manufacturing, reforming state-owned enterprise (SOE) and “premiumizing” consumption.
In its GARP screener, DB screened for stocks with related sector and theme exposures. These themes include renewables, environmental protection, automation, 5G, AI, healthcare, consumption and service upgrade. In order to pick out only high quality growth stocks, DB set an EPS CAGR growth benchmark of at least ten percent in the next two years. To ensure quality, DB also added an ROE benchmark of eight percent.
Investment Theme Stock Picks: Huadian Fuxin. Focused Photonics,Shenzhen Inovance Tech, Yangtze Optical Fibre, Dahua, Universal Medical, China Power International, NIO, China Mengniu Dairy, Wisdom.
- Infrastructure FAI Picks Up: Who Says Investments Are Slowing?
2019 will be a year where infrastructure fixed asset investment growth picks up from the low single-digit growth in 2018. So far, there have already been positive signs of this boost as local government bond issuance spikes. Several mega infrastructure projects like metro railway and waterway are also kicking off in the next few months. Plus, DB identified that there are abundant opportunities for infrastructure fixed asset investments as China’s urbanization is still in progress.
Under its infrastructure theme, DB highlights stocks that are components of MSCI China index and has a market cap of at least US$2 billion. These stocks also need to fall within the following sectors: Construction, machinery, basic materials and environment. The third criterion is that the stock needs to show relative underperformance since the Chinese government’s suggestion of a spur in infrastructure fixed asset investment.
Investment Theme Stock Picks: China Comms Construction, Zhuzhou CSR, Hollysys Automation, Focused Photonics, CNBM, Anhui Conch, BEW, China Oriental, China Everbright, Yangtze Optical Fibre.