2019 midyear outlook—Greater China equities

Hong Kong/China equities staged a strong rebound in the first four months of 2019 before trade tensions between the United States and China reemerged in May.¹ The pause in bilateral negotiations between the world’s two largest economies triggered a market correction,² which stabilized toward the end of June as both sides agreed to renew trade talks after the G20 meetings. We believe U.S.-China trade tensions are structural in nature and may ultimately transform the current global trading order.

Planning for the day after tomorrow—looking beyond the market noise

After greater China equity markets recovered in the first quarter of 2019, the escalation of trade tensions between the United States and China in May once again dominated market sentiment. Although higher tariffs and the surrounding boisterous rhetoric drew the most market attention, we believe the real story for investors is the Chinese government’s strategic support for its own economy, both over the short term and long term, to aid its transition to a consumer-based, value-added economy.

Government policy reforms promote a better business environment

Overall, equities in China have held up relatively well in recent months, primarily due to Chinese government monetary and fiscal policies. The People’s Bank of China has adopted an accommodative policy stance, cutting the reserve rate requirement for banks and maintained ample liquidity amid volatile markets. The government has also progressively unpacked its fiscal policy toolbox to make it less expensive for companies to conduct business and for consumers to retain more of their income. Indeed, businesses benefited from numerous policies, including the three-percentage-point cut in the value-added tax (VAT) at the highest tranche and a reduced pension contribution rate for employers³ that will lessen the cost of doing business in China. The country’s property⁴ and infrastructure⁵ sectors have also benefited from preferential government policies.

At the same time, the Chinese economy has benefited from ongoing economic restructuring and structural reforms through alleviating pollution in cities and improving the health of industries plagued by overcapacity. In addition, some enterprises have strengthened their ability to pay down debt, which in turn has bolstered the financial system, enabling the banking industry to record the lowest problem-loan ratios in five years.⁶ In our view, these measures have put China’s economic fundamentals on better footing than they were just a year ago.

Corporate earnings in China remains healthy

These improved fundamentals were reflected in corporate earnings. During the first quarter, insurance and consumer staples companies delivered better-than-expected results, and we believe that the insurance sector is bottoming out after a sharp slowdown in 2018. Many insurers have sold more protection policies, resulting in strong VNB growth (value of new business growth, which measures the value of an insurer based on the level of new business achieved over the past year) and improving margins, and that momentum should continue for the rest of the year. Some consumer staples companies are seeing gross margins improve as material costs drop.

After the release of first-quarter corporate results, markets began revising up estimates. The market was originally expecting double-digit earnings growth for FY2019. Although tariffs are likely to shave two to three percentage points off earnings in 2019 and 2020,⁷ respectively, we believe corporate China’s bottom line will hold up over the short term. We believe that in the second half of the year, government measures to help mitigate the economic impact from China-U.S. trade tensions will provide support to Greater China equities, although we anticipate continued market volatility.

Amid short-term volatility, our long-term investment themes stand

While focusing on short-term developments can be important, following daily market gyrations closely and the volatility of the bilateral trade talks can obscure the bigger picture. Amid the recent volatility, we held on to our long-term belief that many attractive opportunities exist in China’s transition to a more consumer-based, value-added economy.

Indeed, even before bilateral trade tensions escalated, we were already planning for “the day after tomorrow” and we selected three long-term investment themes that we believe will benefit from China’s gradual economic transition:

  • Research and development (R&D)/innovation—China’s government and corporations have put increasing emphasis on R&D and innovation to improve competitiveness. This shift isn’t new: Companies have increased R&D investment under the 13th 5-year plan (2015–2010),⁸ but the emphasis has clearly accelerated as trade tensions have led to the United States to ban Chinese imports of certain intermediate goods, changing global supply chains. We believe Chinese companies will continue to invest more in this critical area, particularly basic research, as a means to move up the value chain. We’re constructive on upstream technology, industrial applications, and the country’s burgeoning healthcare sector.
  • Policy driven—China’s government has identified several key policy areas as targets for fiscal spending over the long term. Environmental protection, which includes supply-side reform, natural gas, waste-to-energy, and wastewater treatment, are key areas that will continue to receive government support. As the government unveils further measures, we’ll remain vigilant to identifying the next key beneficiaries of government support.

With these themes in mind, we view protracted China-U.S. trade tensions (in some form) as a structural feature of the market landscape moving forward. The implications of recent trade policies, particularly the decision to restrict Chinese technology companies’ access to U.S. suppliers, have injected greater uncertainty into the Chinese investment landscape. Even if the trade sanctions are ultimately removed, we believe the bifurcation of global technological supply chains into two camps—the United States and China—is a real possibility that may potentially bring about short-term pain, but also serve as a long-term catalyst for Chinese companies to boost their competitiveness on a more urgent timeline.

Planning for the day after tomorrow must be done today

When the fog of uncertainty stemming from U.S. policies finally dissipates, we expect significant opportunities to emerge for investors, and when they do, we believe they’ll fall into the themes we’ve already identified.


1 Bloomberg, June 14, 2019. A market correction is generally defined as a decline of 10% or greater in the price of equities from its most recent peak. “China is plugging pension hole by tapping into US$25 trillion in equity in state-owned enterprises,” South China Morning Post, May 21, 2019. “New home prices rise in almost all Chinese cities as lower mortgage rates, lighter restrictions spur demand,” South China Morning Post, May 16, 2019. 5 “China infrastructure stocks climb as Beijing offers support,” Financial Times, June 11, 2019. 6 China Banking and Insurance Regulatory Commission, May 10, 2019. Problem loans are defined as special mention loans and nonperforming loans. 7 Morgan Stanley, May 14, 2019. The 13th 5-Year Plan (2015–2020) set a goal of R&D expenditure reaching 2.5% of GDP by 2020. In 2018, R&D expenditure accelerated to 2.18% of GDP, according to the National Bureau of Statistics of China, as of February 28, 2019.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments. It is not possible to invest directly in an index.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeim.com/institutional.

Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited. 


Kai-Kong Chay, CFA

Kai-Kong Chay, CFA, 

Senior Portfolio Manager, Asia ex-Japan Equity

Manulife Investment Management

Read bio