Equity investors gazing toward China for 2021

With the strong rebound of China's economy along with hope for improved relations with the United States, global investors are looking to stocks on the Chinese mainland.

Investors are betting Chinese stocks will extend their bull run and that mainland corporate earnings in 2021 will be boosted by a global economic recovery and a more predictable Sino-American relationship.

Chinese mainland stocks already have climbed more than 20 percent this year due to the economy's early recovery from the novel coronavirus pandemic.

In its China outlook report, Goldman Sachs said, "China will deliver one of the strongest and fastest macro recoveries in 2021 among major economies globally."

The New York investment bank forecasts a rebound in Chinese corporate profits and recommends 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 President-elect Joe Biden replaces President Donald Trump in the White House.

"Investors may perceive the Biden administration as a better outcome to US-China tensions or relations, at least from the trade and tariff standpoint," Kinger Lau, Goldman's chief China equity strategist, told the South China Morning Post (SCMP).

Xing Ziqiang, chief economist with Morgan Stanley China, predicted that China's GDP growth will be nearly 9 percent next year, and the main drivers will be consumption, investment in manufacturing and exports.

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

China's factory sector activity grew at its fastest pace in a decade in November, according to a business survey released Tuesday.

The Caixin China General Manufacturing Purchasing Managers' Index (PMI) rose to 54.9 last month, the highest level in a decade and compared with 53.6 in October, said the report by media group Caixin.

"Manufacturing continued to recover and the economy increasingly returned to normality as fallout from the domestic Covid-19 epidemic faded," wrote Wang Zhe, senior economist at Caixin Insight Group.

"China's recovery is secure, and good expectations about the economies overseas will strengthen on the progress on the vaccines," Qin Peijing, an analyst at Citic Securities, told the SCMP.

China's benchmark CSI300 Index is expected to rise around 12 percent in 2021, Morgan Stanley predicts. Goldman forecasts a 13 percent gain in the index, while UBS expects an increase of about 10 percent.

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

Fund giants including BlackRock, JPMorgan and Vanguard already have 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 percent of them said they plan to increase their China portfolios by an average of 25 percent over the next 12 months. Among the equity investors, 71 percent are looking to increase China exposure.

"For investors to properly position their portfolios for the post-COVID world ahead, in the new world order, they need to have more of their investment portfolios allocated into China," Paul Colwell, head of the advisory portfolio group for Asia at insurance brokerage Willis Towers Watson, told CNBC on Monday. "Geopolitical diversification is going to be a much more important portfolio … consideration in the years ahead."

Colwell said global investors are weighted only about 5 percent in Chinese equities. He said they should scale up to 20 percent over the next decade.

The internationalization of RMB will send the average inflow of foreign capital into China between 2021 and 2030 to $200 billion to $300 billion, according to Xing of Morgan Stanley China.

However, foreign buying could let up next year, as rapid stock valuation-expansion and currency appreciation make the onshore stocks expensive relative to shares trading in Hong Kong, according to New Times Securities, the SCMP reported. Chinese mainland stocks are now more than 40 percent more expensive than those in Hong Kong.

Also a concern for investors is China's appreciating currency.

Jim Collins, CEO of Excelsior Capital Partners in New York, told China Daily, "I am sure that electric-car stocks will keep flying, but I think the biggest factor impacting Chinese stocks in 2021 will be currency. If the RMB continues to strengthen, I think investors will find cheaper plays elsewhere."

"We like some of the A-shares, but generally it's quite expensive," Andrew Gillan of Janus Henderson Investors in Singapore said of the Chinese mainland stock market.

Reuters contributed to this story.