Global investors see China stocks bull run lasting well into 2021

Global investors are betting Chinese stocks will extend their bull run and that mainland corporate earnings in 2021 will be boosted by a world economic recovery and more predictable Sino-U.S. relationship.

Chinese onshore stocks have already jumped over 20% this year thanks to the economy's early recovery from coronavirus. Another bumper year is ahead, investment banks say.

"China will deliver one of the strongest and fastest macro recoveries in 2021 among major economies globally," Goldman Sachs said in its China outlook report, forecasting a 20% rebound in Chinese corporate profits, and staying overweight Chinese equities.

Morgan Stanley also remains overweight China, forecasting "solid" earnings growth amid the backdrop of a strong, broad-based global recovery, and a potentially more predictable trade environment once Joe Biden replaces Donald Trump in the White House.

China's benchmark CSI300 Index is expected to rise to 5,570 points at the end of 2021 in a base case scenario, Morgan Stanley predicts, roughly 12% up from the end-November level of 4960.25. Goldman forecast a 13% gain in the index, while UBS expects an increase of about 10%.

Chinese regulators have been aggressively wooing foreign investors with accelerated moves to open up China's capital markets.

Global fund giants including BlackRock, JPMorgan and Vanguard have already boosted their exposure to Chinese equities this year, according to Citic Securities, and foreign inflows will likely accelerate further.

"International appetite for access to Chinese financial markets is at an all-time high," said Justin Chan, Head of Greater China, Global Markets, HSBC.

"A steady stream of developments, from index inclusion to Stock and Bond Connect schemes, is opening this market like never before, and yield hungry investors from across the world are piling in."

In a survey published last week by HSBC of nearly 1,000 top global institutional investors and large corporations, 62% of them said they plan to increase their China portfolio by an average of 25% over the next 12 months. Among the equity investors, 71% are looking to increase China exposure.

Despite a surge of inflows - foreign holdings in Chinese onshore equities more than doubled over the past two years to exceed $400 billion - China remains under-represented in most global investment portfolios, according to Willis Towers Watson.

The global advisory suggests investors should now consider Chinese equities as a stand-alone allocation, rather than part of global or emerging market strategies, so that they can enjoy the full benefits of diversification and excess returns the market offers.

China's stock market will not only benefit from foreign inflows, but also from domestic asset rotations out of shadow banking products and properties, according to UBS.

"One major theme for 2021-22 in our view is the likely rise of Chinese household assets in onshore equities," said Wendy Liu, head of China Strategy, UBS Global.

Sector-wise, Morgan Stanley identified several industries that will benefit from China's focus on innovation, technology localization and consumption uprades. They include high-end manufacturing, healthcare, biotech, defense and aerospace.

But Andrew Gillan, head of Asia ex-Japan Equities at Janus Henderson Investors in Singapore, fears the upward momentum in China stocks could be losing steam.

"We like some of the A-shares, but generally it's quite expensive."

($1 = 6.5828 Chinese yuan renminbi)