China’s economy entered a cyclical downturn in 2014 and it will take several years for it to stabilise. We expect 2016 to be another year of adjustment with a slowing economy, deflationary pressure and further rate cuts. Property investment growth is likely to turn negative for the first time. The PMI will continue to contract at least into 1H16, but the risk is that it will last longer. On the positive side, the renminbi will depreciate less than bears think. Consumers and employment are likely to remain resilient. China’s “new normal” is necessary to work out the excesses of the past, but it will take time.
Our survey of 520 consumers shows that they are less optimistic Our survey of 520 consumers shows that they are less optimistic than in past years and are feeling the impact of lower wage growth. Consumers still plan to spend more next year even on basics and will upgrade brands. Travel is a top priority and so is upgrading appliances and buying a modest car. They are less certain on property as most do not plan to buy property next year. There is optimism for stocks again, but they only plan to make a small investment.
Important to position in sectors that can grow earnings during cyclical downturns We highlight our top 10 investment themes. It is important to be positioned in sectors that can grow earnings during cyclical downturns and have government support. There are strong secular themes such as the internet, healthcare and the environment. Reforms will continue with expansion of the stock connect scheme with Hong Kong and SOE restructuring. Policies to boost growth will accelerate such as One Belt, One Road (OBOR) and Made in China 2025. The consumer will remain a key theme with the new two-child policy plus strong demand for travel, autos and appliances. But A shares will likely see a correction.
Expect the market to be weak in 1H16 as the economy continues to slow and stronger towards the year-end China and HK markets are likely to end in negative territory in 2015. We expect the market to be weak into 1H16 as the economy continues to slow and then improve towards the year-end with peaking of property inventory and the low base effect of commodity prices.