Greater China Stocks: 3 Investment Themes for 2018

Greater China stocks have grown about 40% year-to-date mostly on the back of global synchronized growth.

Chinese stocks grew almost 15% during the third quarter as China's economy remained resilient with GDP growing by 6.8%. Meanwhile, Hong Kong and Taiwan's economies both fared well. Overall exports from Hong Kong soared thanks to the global economic upturn. Service exports and private consumption expenditure propelled year-on-year growth to 3.6% in the third quarter, marking the fourth consecutive quarter of above-trend economic expansion. Taiwan's economy expanded by 3.1% year-on-year in the third quarter, beating market expectations on the back of higher exports and steady growth of domestic private consumption.

Kai-Kong Chay, Senior Portfolio Manager, Greater China Equities for Manulife Asset Management remains constructive on Greater China as he expects earnings growth in 2018 will remain solid - although growth rates will likely moderate due to a higher base. Kai-Kong says the following three investment themes will be key in 2018:

Environmental Protection: Natural Gas & Electric Vehicle Use Set To Grow
At the 19th National Congress of the CPC held in October, President Xi Jinping mentioned the phrase
To combat air pollution, the Chinese government introduced the
China has also been focusing on the development and promotion of electric vehicles, which is poised to lead the second-generation automobile market. We expect the manufacturing cost of electric vehicles to fall to petrol vehicle levels by 2025 - 2031. We also believe lower prices will drive a surge in demand and penetration of these vehicles.12 Renowned carmakers have postponed the introduction of new electric vehicle models to the first quarter of next year, but we remain optimistic regarding investment opportunities brought about by these vehicles and their related supply chains. This includes areas like rechargeable batteries and accessories for electric cars; and increased demand for advanced driving assistance systems in the region. Weight reduction in electric vehicles will help to improve their endurance performance, making them more appealing to consumers.
R&D & Innovation: Automation, Better Internet, Smartphone Tech & More
R&D spending has been rising rapidly in China. The country has undertaken strategically important research and development, focusing on artificial intelligence, automated production, and high value-added manufacturing industries. R&D expenditure accounted for around 2% of GDP in 2014.13 This is expected to increase gradually to 2.8% by 2030.14 We will look for opportunities arising from this trend.
As social media sharing platforms and live streaming gain popularity, the compound annual growth rate, or CAGR, of global internet data usage is expected to reach 27% during the period between 2016 and 2021.15 This is likely to be supported by increasing demand for cloud computing, data center switching, and better internet speed. With that in mind, we see opportunities in Taiwanese tech companies, which are likely to benefit from increased R&D expenses and automation trends, such as high-speed interface chip design companies. We also see opportunities in the smartphone-related component supply chains - for instance, in areas such as dual-cameras, substrate-like printed circuit boards (SLP), and 3D-sensing technology.
State-Owned-Enterprise (SOE) Reforms & Public-Private Partnership
Successive SOE reforms have led to a drop in the number of central SOEs in China, dropping from 112 in 2015 to 98 currently. The trend is expected to continue, with the figure likely dropping further to about 80.
Some SOEs are starting to enjoy the benefits stemming from the reforms, providing for mixedownership. Benefits include enhanced core business performance, better corporate governance, and streamlined internal operations. In our view, relevant opportunities should begin to emerge in the next two to three years.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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