Aroau Capital Holding: How did the Chinese Equity Market absorb the impact of COVID-19?
By Aroau Capital Holding
As of early March, the economic impact of COVID-19 has triggered a significant setback across global markets. The exponential rise in the amount of COVID-19 cases outside of China has thickened the layer of uncertainty for both domestic and international investors. Since late February, the ASX200 has plunged 13.2% while the S&P 500 experienced a similar dip of 11.5%. Emerging market volatility has forced both the RBA and Federal Reserve to cut rates (0.25 and 0.5 respectively) as a last-minute appeal to inject more liquidity into the markets. As the media spotlight gradually turns towards the coverage of an emerging global epidemic, the virus’s impact on the world’s second-largest economy, China, has, to our surprise, been absorbed.
As of early March, compared to other global indices, the Shanghai Stock Composite’s saw a “V” shaped rebound (Graph 1) that is close to fully absorbing the 7.8% contraction which occurred when the markets first opened after the New Year’s break. Ironically the current crisis has ignited a sense of optimism for global investors, who predict long-term growth opportunities within the world’s second-largest equity market. Higher demand for online services, improved government transparency, planned capital market reforms and more professional public-private partnerships are all major contributing factors behind this wave of market optimism. China’s market rebound also reflects the nation’s 2020 service orientated market economy (Graph 2) and a wide buffer zone, represented through China’s 0.40 correlation relation with global stock indices, against global systemic risks.
In the short-term, just as in the 2003’s SARS epidemic where Alibaba launched its Taobao online retail platform, laying the foundation for China’s ecommerce frenzy. New industry trends such as video conferencing, health, logistics and online entertainment have witnessed a surge in market demand, laying the foundation of what may become the blueprint for a systemic shift in consumer behaviour. In the mid to long-term, retail investors, who make up 86% of China’s equity market are predicted to become more conservative with their investments providing an opportunity for institutional investors to buy into China’s foundational stock sectors. These include financial services, construction and consumer staples, all of which have seen a subtle decrease in market valuation led by the exit of retail investors.
2020 is the final year of China’s 13th Five-year plan period, and many economic targets are yet to be met. We predict, under the guidance of previous government announcements, that a more excessive economic stimulus package will be implemented when COVID-19 is declared under control. With an existing top margin of inflation and limited new infrastructure projects, the flow of this planned stimulus is most likely going to end up in China’s Ashares market. In support of this consensus, over 10 million new A-Share investor accounts were created in recent months, a growth trend aligned with the pessimistic outlook for other markets in 2020.
Despite the virus, according to the Shanghai Advanced Institute of Finance, China’s economic growth is still predicted to grow around 5%-5.5%. In contrast to the growing number of COVID-19 cases across the world, China has seen an evident decrease in the number of new cases while the number of recoveries has almost reached 60,000. The financial markets deliver a parallel image presenting investors with a chance to gain a better understanding on the Chinese equity market, which in our opinion has yet to receive its fair share of attention from global investors.
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