China  

Opportunities abound in Chinese markets

This year saw China equity markets hit before other markets, but the drawdown was much less than in other major markets, and in recent weeks we have seen a meaningful rally. China has shown faster improvements in economic data than the rest of the world, helping to drive the ‘first-in first-out’ narrative.

Also driving this rally has been support from the state media and positive newsflow around the launch of A-share (onshore) linked derivative products, one of the key issues flagged by MSCI as needing attention before further index inclusion can take place.

H-shares (offshore) have also performed well, so the recent rally is
not just coming from onshore retail flows.

As with CGBs, overseas investors are still underweight China equities, and we expect the historically attractive valuation discount to help this ownership gap narrow as we progress through 2020.

While we are maintaining positions rather than adding to Chinese equities at present given our overall cautious view and bias to duration assets, the case for China equities remains compelling, on a relative basis.

Overall, China offers the most attractive opportunities for investors across the capital structure. With developed markets showing stretched equity market valuations, at least partially driven by historically low real yields - also a headwind for income investors - we think looking east is a prudent option.

George Efstathopoulos is a portfolio manager at Fidelity