Asia and China 2021 Outlook
Strong Asia recovery in 2021 with China leading the pack
Parts of Asia and China have emerged as the winners of COVID-19 in 2020. Going forward in 2021, Asia is expected to post strong GDP growth of 6.8%. However, growth will be uneven across the region. Markets like the Philippines that continue to struggle with COVID, will have difficulties reaching pre-pandemic GDP levels. Countries like China, Vietnam and Taiwan that have and continue to aggressively contain COVID-19 will post strong macroeconomic recovery in the new year. China in particular, will be the primary growth engine in the region (and the world) and is expected to post over 8% GDP growth rate in 2021.
Capital market inflows surge, particularly to China
Low interest rates and negative yields in US and Europe have driven international investors to Asian equities and debt markets in 2020. This trend is expected to continue in 2021 with China as the key beneficiary. Inflow of foreign capital to Chinese on-shore equities and bonds have surpassed US$837 billion at the end of September 2020, an 800% increase from 2014. Index inclusion and planned increases in the top 3 global bond indices (i.e., FTSE Russel WGBI, JP Morgan GBI-EM, Bloomberg Aggregate Index) will continue to drive flows into China’s debt markets in 2021.
Similarly, foreign capital inflows to China’s equity markets will continue to surge. In January, Chinese regulators added STAR (China’s Nasdaq) stocks to the Hong Kong-Shanghai Stock Connect, increasing the number of investment opportunities open to international investors. Analysts predict that global indices (e.g., MSCI EM, FTSE GEIS) will further increase the weighting of Chinese A-share equities. Moreover, a robust pipeline of Chinese tech IPOs in 2021 attracts strong international investor interest (e.g., Kuaishou, Bytedance, Didi, ANT).
Significant growth opportunities in China
Given the favorable macroeconomic and capital market trends, there is significant opportunity in Asia and in particular China. Moreover, there is tremendous growth potential as China is typically under-represented in an international investor’s portfolio, in stark contrast to China’s outsized role in the global economy (15% of global GDP).
Overall, we see five pre-dominant investment themes in 2021 based on China’s 14th Five Year Plan and the “new normal” post-COVID-19, including:
1. Digitization: China will focus on indigenous innovation (e.g., fintech, digital health, biotech), technological self-sufficiency (e.g., semi-conductors) and investment in digital infrastructure (e.g., 5G, cloud and data centers, high speed rail, smart cities) and frontier technologies (e.g., robotics, AI, IoT, etc..)
2. Greentech: China aims to dramatically reduce emissions by 2030 and be carbon neutral by 2060 by aggressively developing electric vehicles and alternative energy sources including solar, hydro and wind power.
3. Consumption-driven growth: China will promote domestic demand to drive growth. There will likely be a rebound in discretionary spending (e.g., retail, luxury, restaurants and catering, entertainment) in the first half of the year, followed by a recovery in travel and hotel sector in the latter part of the year as international travel resumes.
4. Health and fitness: Steady growth is expected in pharmaceutical, traditional healthcare services, medical devices, and lifestyle/fitness devices.
5. Recovery in cyclicals: As the world emerges from COVID-19 in the latter part of 2021, there should be recovery in traditional exports such as auto parts and mobile phones.
The ACATIS-QILIN Marco Polo Fund continues to adjust the portfolio to capture these opportunities in 2021.