China outlook 2021

-- | 05/01/2021 Text size Decrease

Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Lorraine Tan. She's an equity analyst at Morningstar in Singapore. Hello. Lorraine Tan: Hi, Holly. Black: So, Lorraine, you've been looking at the Chinese market in particular and North Asia. Now, obviously, if we go back to the start of 2020, China had a really rocky ride, but what did the rest of the year look like for the region? Tan: Well, it was a bit of a surprise, but with the pandemic sort of taking root, the sharp market falls, the amount of liquidity that just came into the equity space was probably surprising to most of us. And we've seen that the huge run-ups in share prices not just in the US markets, but basically most global markets. So, I think of anything. Although it created a lot of opportunities for investors, but obviously we're faced with dilemmas now. Black: So, going into 2021, I think one of the big questions for China or investors in China is how are things going to play out under a US President Joe Biden. What are your thoughts on that? Tan: Yeah. I think the main thing about President-elect Biden is that he will bring a little bit more predictability, especially to multilateral relationships, China being one. We do think he will be a little bit more open-minded when it comes to the trade tariffs. I think he has explicitly mentioned that he doesn't like the trade tariffs. Whether or not that's a priority for him to address the China relationship is another story, but I think essentially, he will look to it as a negotiation tool. I think it's not necessarily—I think that whatever happens with the trade policies, I think the Sino-US relationships will still be challenging because there are some obviously ideological differences there. Black: And are there any other challenges or risks that people need to keep in mind for this year? Tan: I think on the near term, what we're seeing is, obviously, the run-off in the US Georgia Senate elections, I think market prefers to have a split Senate house, especially because of the concerns over incoming increase in taxes for one. I think that's an immediate term weakness or risk to the market sentiment that we're expecting to see. We also have, I think, in particular to the US markets, perhaps some sort of rather exuberant valuation. So, essentially, that the vaccines coming in will sort of cure everything, but I think that could take a little bit of time to pan out and it really just means what everybody is expecting there. Black: So, if we think on a sector level, where are you finding the most interesting opportunities at the moment? Tan: Yeah. So, if we look at Asia, you'll notice that the Asian markets tend to trade—have traded basically at a slight discount to our fair value estimates. And the thing with the run-up in 2020 is that we had a couple of sectors really sort of outperform or be relatively quite overvalued and of course, that's technology. I think that's been true of the global markets. So, we look at it now, there are sectors that are undervalued, but the gap has narrowed recently with some of the rotation plays. Looking at Asia specifically, the cheapest sectors right now are healthcare and real estate. Those are going to be laggards, obviously. But I think in healthcare, I think there's specifics to the China healthcare situation there. I mean, this is the time of year the government likes to come out with their pricing guidance. So, the markets are probably a bit wary right now of those names. So, there could be an opportunity there. Black: And do you have any top stock picks? Tan: Yes, we do. I think among the undervalued sectors that we're looking at, China healthcare in particular, we're looking at Genscript. We also like some of the Japanese F&B names. These are all quality moaty names like CALBEE and Asahi Beer. Also, whenever—since China consumption is still going to be fairly strong for the next several years, we think that whenever there's a pullback in names like Tencent or Alibaba, that we'd always take a look at those as well. Black: Lorraine, thank you so much for your time. For Morningstar, I'm Holly Black.