The Ox Takes a Breather
While the year of the Ox started off strong for global financial markets, the end of the lunar new year celebration also saw the party ending for many major indices. Concerns over rising bond yields, and high valuation of tech-related stocks led to selling pressures on the China market. Though the sell-off was focused on the tech sector at the start, uncertainties have caused a domino effect to knock down other sectors as well. Evidently, this has caused the China equity market to stumble a little, but its economic data remains very much intact.
Why so Spooky?
So what changed in global financial markets that spooked investors, and caused them to dump their shiny performers of 2020?
The prospects of global economies reopening, and higher expectations for growth this year has initially provided a boosters for risk assets. But the liquidity tap is expected to be turned down as global growth expectations rise, leaving global central banks the option to roll back their stimulus plans. And after being cast aside, bonds are making a comeback with a vengeance. US 10-year treasuries now yield higher than the S&P 500 Index! Starting the year at a yield of 0.92%, yields have now spiked to 1.574%, beating the S&P 500 Index whose dividend yield is at 1.57%.
The slide in performance has led the broader China market to see approximately USD1.2 trillion being erased from its stock market value. But is this an effect of the markets taking a breather before its continue climb upward?
Leader of the Pack
China has released robust trade data despite most other global economies stuck in lockdown. Export numbers grew by an impressive 60.6% YoY for the combined months of January and February – outpacing analysts’ forecast of 38%. The numbers were also way ahead of the 18.1% YoY growth recorded in December.
The stronger economic data suggests that the world’s 2nd largest economy has found steady footing. With focus turning towards domestic consumption, and the service sector, the New China Economy seems set to continue its upward trajectory and further cement its role as a major contributor to the country’s economic growth.
China continues to dominate the global ecommerce market – taking lead over brick and mortar sales, which has proven beneficial in view of the containment measures that the country put in place to control the spread of the virus. Only 10-years ago, both China and the US were seeing approximately 5% of its total retail sales derive from ecommerce. Today, China’s ecommerce enjoys more than 50% of the total retail sales, while the US lags at 15%.
The rapid rise of its ecommerce sector can be attributed to the innovative strategies of the tech companies in China. Giants such as Alibaba, and JD.com have emerged victorious with their accessibility, affordability, and reliable supply chain solution. So well connected are they that the companies had successfully assisted with the delivery of food, and medical supplies during the lockdown early last year. And companies in China are taking it a step further with the rising popularity of social retail where consumers band together to make bulk purchases, and livestreaming where retailers set up live viewing sessions for consumers. In 2019, Taobao generated more than USD 30 billion through sales carried out through livestreams, capitalising on the more than 388 million users (as at December) that it has.
China’s digital payment system is also seen to be a step ahead of its competitors with the services that it provides, along with its successful adoption rate by the locals. China has close to 1 billion mobile users (out of its 1.4 billion population), which is more than the population of the US. Even back in 2018, China was already seeing mobile payments making up more than 80% of all payments.
Dual Circulation: China’s long term focus for sustainable economic growth
Dual circulation remains the government’s focal point as it solidifies its 14th 5-year plan (for 2021-2025). The strategy will look into the parallel development of both its domestic, and international circulation. Domestic demand is recognised as vital for the country’s economic growth with President Xi acknowledging that the ability to develop the domestic market’s potential would be beneficial to the synchronising of both domestic and foreign markets as it builds a robust and sustainable economy.
The New China Economy is seen to be a strong beneficiary from the government’s focus towards boosting domestic demand. The term New Economy covers sectors that are tilted towards consumption, and services such as internet / e-commerce, healthcare, beauty & personal care, travel & tourism, financial services / insurance, and clean energy. Basically, it’s a shift away from the conventional (or Old Economy) sectors such as manufacturing and industrials, as well as banking.
The New China Economy: Differentiation a Key Driver
An index that has fast been gaining traction over its Old Economy peers is the S&P New China Sectors Ex A Share Index. The Index is tracked by the TradePlus S&P New China Tracker (NewChina ETF), and holds exposure into tech giants such as Alibaba, Tencent, JD.Com, as well as the famed hotpot chain Haidilao, and electric car maker Nio (Tesla Inc’s rival in China).
The differentiation in the index’s constituents has nudged it ahead to lead the pack, benefitting the NewChina ETF. The NewChina ETF recorded a gain of 22.9% in MYR terms in the month of February when its NAV hit an all-time high of RM 10.1013 on 17 February. Though the recent correction caused by the sell-off in the tech-sector had led the NewChina ETF to shed 13.6% from its high, the ETF is still holding on to a 6.2% gain on a YTD.
At the time of writing, the spike in yields that had sparked the sell-off has slid lower, boosting the performance of the tech sector. Tech-heavy Nasdaq 100 Index jumping more than 3% higher last night, and is providing a glimpse into the possibility of a strong comeback for the tech-sector.
The New China ETF
The NewChina ETF, which was listed on Bursa’s main market in January 2019, provides investors:
- Simplicity in investing - By gaining exposure into 92 New China Economy-related stocks through 1 single trade
- A cost efficient option - Through the NewChina ETF, investors can avoid paying foreign brokerage charges for exposure into stocks listed on the Hong Kong stock exchange, as well as the US listed ADRs
- Convenience - To gain exposure into foreign markets through Bursa, using Ringgit
About the New China ETF
- The 1st dual currency listed ETF in Malaysia.
- Trades under the Bursa stock code: 0829EA (for MYR Currency), and 0829EB (for USD Currency).
- The ETF closed at a NAV per unit of RM8.7241 (as at 9 March 2021).
- How to trade?
- ETFs trade just like stocks
- So all you will need is a brokerage account
- Just call your broker, or get onto their online platform – and start trading
Performance of the Index vs. Other China Related Indices (Percentage Returns from 31 Dec 2020 - 5 Mar 2021)
Source: Bloomberg as at 5 March 2021. All returns are quoted in MYR terms.
Need More Info?
Feel free to contact the ETF team for more info, or reach out to us via any of the below platforms for more information.
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