China leads
The tragical deterioration of Covid-19 in Europe and the US in the past 2 weeks has reinforced confidence of Chinese people, not only on the V-shape recovery of their economy, but also on perceived strength of their political system and culture. We think such confidence could have positive feedback loop, and outperformance of China assets (including China ADRs traded in the US) will likely continue.
V-shape recovery in China, U shape elsewhere
It is possible that China’s real GDP in 1Q dips below zero (but we doubt the Bureau of Statistics will print that number) but full year number still maintains at 5.5%-6%. The virus spread is clearly under control, and Chinese workers have never have so much work enthusiasm as right now. Production resumption rate is on track to approach 90% in mid-to-late March, and consumption is gradually recovering as we speak, likely to regain its footing mid-2Q. Credit expansion and fiscal support can be dramatic, with overheating risk a possibility.
On the other hand, however, we can only hope the coronavirus to peak out in mid-2Q in the US, with significant hit to 1H GDP and corporate earnings. Supply disruption triggered by China shutdown will be met with demand destroy due to lower consumer confidence. If large-scale quarantine measures put into place, further damages will entail. In the past 2 weeks, US bond market is pricing in a L-shape economy trend while the equity market vacillates between the likelihoods of a U shape and a L shape. Policy arsenal is also arguably very limited in EU and the US compared to that in China.
Cyclical rebound to continue, quality technology names still favorite
A mild style/sector rotation already happened last week in A-share market, as investors expect a full scale infrastructure investment boom. We think cyclical names especially in property and consumer cyclical are still attractive in terms of valuations and possible 2H rebound in earnings. However, although we dislike speculative activities in A-share Chinext, technology is a longer term secular trend, and real demand for 5G, electric vehicles and enterprise software will take hold. Stocks we like include Tencent, Meituan, Alibaba, PDD, TAL, Bilibili and CATL.
How Covid-19 will reshape global power?
While China badly mismanaged the initial outbreak, more recently the country has tried to spin its apparent success in containing the virus as a triumph of its autocratic system. Expect that argument to gain further traction if the U.S. bungles its own response. Even before Covid-19, liberalism has already faced heightened challenges, and populism is on the rise. If Covid-19 drags US economy into a long overdue recession, and China emerges unscathed, the balance of political influence will increasingly tilt towards China. China model will be hailed by other developing countries as a viable alternative to western democracy. Rising exports of Chinese AI tools for real life surveillance and online censorship is a case in point. Therefore, we won’t be surprised to see more frictions between China and the US, no matter who is in the oval office. That said, another scenario is also possible where Trumpism gets debunked partly thanks to Covid-19, and liberal democracy reinvents.