COVID 19 IMPACT Risk and opportunities in China and the Region - - PowerPoint PPT Presentation

COVID 19 IMPACT

Risk and opportunities in China and the Region

Lynda Zhou, CFA Portfolio Manager, Fidelity International

IMPACT OF COVID-19: RISKS

Momentum of deglobalisation and protectionism expediated

▪ Wealth inequality continues ▪ Populism and national protectionism on the rise ▪ Supply chain security concerns and migration ▪ Deglobalization and inflation accelerated Expenditure outlook by income Trade openness index, 1870-2017

62% 73% 65% 57% 54% 30% 21% 29% 33% 37% 8% 6% 6% 10% 9% 0% 20% 40% 60% 80% 100% Total < RMB 6,000 RMB 6,000- 14,4999 RMB 15,000- 29,999 ≥ RMB 30,000 May cut down expenses May not cut down expenses May increase expenses Source: Morgan Stanley, May 2020 Source: PIIE, Our World in Data, April 2020

IMPACT OF COVID-19: OPPORTUNITIES

Importance of technology adoption highlighted

▪ Higher incentive to adopt automation to reduce reliance on labour ▪ Increasing demand on internet both hardware and software ▪ Countries with good IT infrastructure will take the lead

Source: Fidelity International

Lifestyle changes

▪ Spend more inside China ▪ High end consumption will outperform ▪ Higher expenditure on health care, for example vaccine

Opportunities for the region

▪ Benefit ASEAN countries as low-end manufacturing move out from China ▪ Benefit Korea, Japan, Taiwan as tech supply chain in China may need an alternative

CONSUMPTION UPGRADE

Economic Reform Continuously Drives Development of the Industry

Source: Statista

China consumer’s spending on luxury goods will continue to grow

152 311 537 770 921 1,227 1,263 1,482 1,679 2,406 2,609 3,117 500 1,000 1,500 2,000 2,500 3,000 3,500 2008 2012 2016 2018 2020E 2025E CNY Bn China Rest of world 49% 38% 28% 16% 14% 16% 9% 30% 0% 20% 40% 60% 80% 100% China overall Chinese millennials Housing, transport, utilities Shopping, food Shopping, non-food Leisure

China millennials are more willing to spend on leisure and non-necessity

Source: CBRE, Euromonitor, Goldman Sachs.

HIGH-END MANUFACTURING

Industrial robot adoption has ample space for long-term growth

Source: IFR, 2019.

Low density of industrial robot in China Strong demand growth of industrial robot in China

Source: IFR, CRIA, 2019.

100 200 300 400 500 600 700 800 South Korea Germany Japan USA Taiwan China Unit per 10,000 workers

Robotic Industry Development Plan targets 150 unit per 10,000 workers by 2020

50 100 150 200 250 2016 2017 2018 Sales of industrial robot (‘000 unit)

In 2021, China is predicted to represent

▪

Almost 50% of all global new sales of industrial robots

▪

Over 1/3 of all installed industrial robots in the world

FOREIGN CAPITAL INFLOW UNAFFECTED BY COVID-19

Structural transformation in the A-share market

Source: Wind, CEIC, TSE, PBOC, CICC Strategy Research, 2020

Foreign holding ratio (Free float market capitalization) Estimated Stock Connect turnover as a % of total A- share stocks turnover

Source: Wind, CICC Strategy Research, June 2020 Ceiling: northbound buying + selling / total A-share turnover Floor: northbound buying (or selling, whichever is greater) / total turnover Estimated %: median of ceiling and floor estimation

▪ With greater inclusion of A share in MSCI index, proportion of foreign institutional investor is expected to rise, enhancing the maturity of the A share market ▪ Quality style outperformed significantly in the past 5 years

30% 28% 16% 9% 0% 5% 10% 15% 20% 25% 30% 35% Japan Taiwan Korea China 0% 2% 4% 6% 8% 10% 12% 2015 2016 2017 2018 2019 2020 8.1%

Appendix

PROGRESSION OF ECONOMIC GROWTH IMPACTED BY COVID-19

Recovery in 2Q for China and in 3Q for other global economies

Source: Refinitiv Datastream, August 2020

China’s GDP growth V-share recovery in 2Q 2020 (YoY %) GDP growth forecast of global markets (YoY %)

Source: IMF, World Economic Outlook Update, June 2020

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020

2019 2020E 2021E World 2.9

• 4.9

5.4 Advanced economies 1.7

• 8.0

4.8 United States 2.3

• 8.0

4.5 Euro Area 1.3

• 10.2

6.0 Germany 0.6

• 7.8

5.4 France 1.5

• 12.5

7.3 Italy 0.3

• 12.8

6.3 Spain 2.0

• 12.8

6.3 Japan 0.7

• 5.8

2.4 United Kingdom 1.4

• 10.2

6.3 Other advanced economies 1.7

• 4.8

4.2 Emerging and developing economies 3.7

• 3.0

5.9 China 6.1 1.0 8.2 India 4.2

• 4.5

6.0 Emerging and Developing Asia 5.5

• 0.8

7.4

MONETARY POLICY: ACCOMMODATIVE WITH DISCIPLINE

Source: Refinitiv Datastream, August 2019.

Reserve requirement ratio (%) Interest rate difference between China and US

Source: Refinitiv Datastream, August 2019.

0% 5% 10% 15% 20% 25% Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Small banks Large banks 0% 1% 2% 3% 4% 5% 6% 7% Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Fed funds rate China 5Y - Loan rate

A-SHARES ARE ATTRACTIVE IN GLOBAL STOCK MARKETS

Source: Factset, MSCI, as at 11 September 2020.

CSI 300 index

Estimated EPS growth in 2020:

• 1.8%

Estimated P/E in 2020: 15.9x Europe Estimated EPS growth in 2020:

• 32.5%

Estimated P/E in 2020: 22.0x USA Estimated EPS growth in 2020:

• 17.1%

Estimated P/E in 2020: 25.5x Japan Estimated EPS growth in 2020:

• 30.5%

Estimated P/E in 2020: 22.9x World Estimated EPS growth in 2020: -22.4% Estimated P/E in 2020: 24.0x

OPENING UP OF FINANCIAL MARKET

New policies attract institutional capital inflow

Source: Fidelity International, 2020.

Launch of Sci-tech Innovation board (STIB)

• 1. IPO will be changed from CSRC approval to registration system. Significantly reduced IPO cost/ inefficiency
• 2. Price will be set up demand/supply (ie market driven) Vs currently all priced at 23x historical PE.
• 3. Listing rules are much lower requirements than main board
• 4. Limit Up/Down: 20% (vs currently 10%), No price limit for first 5 trading days after IPO.
• 5. Short selling is available from first day trading for STIB stocks.

Removal of QFII / RQFII quota limit Increase in hedging instruments Addition of Stock Connect quota Change of ChiNext’s IPO system from approval to registration basis

This document is intended for the general information of institutional investors only. You should consider

• btaining independent advice before making any financial decisions. Fidelity Australia does not authorise

distribution to retail investors. This document is intended as general information only. This document may not be reproduced or transmitted without the prior written permission of Fidelity Australia.’ to the end.