Despite having the fastest economic recovery from the pandemic in 2020, China had a rockier 2021 than investors anticipated.
“Investor sentiment in China has become more pessimistic over the course of 2021,” said Eric Lin, head of research at UBS.
According to Lin, an influx of regulation impacted industries such as property, internet, and after-school tuition. Meanwhile, earnings growth decelerated materially in the third quarter, as the country’s Covid-zero policy — which relies on stringent measures to halt virus transmissions — has continued to affect consumption.
“Towards the end of the year, investors also had to grapple with the external shock of China ADRs potentially needing to de-list from the U.S., and many wanted to understand the potential sell-off pressures and the impact on liquidity and valuation,” Lin added.
The result: The MSCI China index underperformed the S&P 500 by close to 50 percent in 2021.
While unprecedented stimulus enacted in the wake of the pandemic enabled a swift global recovery, the measures pushed global inflation to levels unseen in decades, observed Peng Wensheng, head of the research department at China International Capital Corp. He said Chinese investors are focused on the impact of countries winding down these accommodative policies, as well as on global supply chains, which have yet to recover since the start of the pandemic.
“Structural opportunities in the China market were relatively abundant if we look into sector performances in 2021, although the overall Chinese equities performance from late 2020 through 2021 has been less exciting,” Wensheng said.
China led the global recovery in 2020 and was the first major economy to gradually roll back policy support in 2021, Wensheng added. “The solid economic momentum China enjoyed at the beginning of last year provided it with an opportunity to push through many structural reforms, which also blunted the market's advances in the short term,” he said. China A-share and H-share performance fell behind global markets in 2021 as well.
But there are bright spots, according to Wensheng, who noted that some sectors and investment themes are significantly outperforming, such as the electric vehicle supply chain and renewable energy and technology hardware companies.
Wensheng said that despite the lingering impact of the pandemic, China’s financial markets have maintained steady steps towards opening up and that “competition in sell-side research in China has only intensified under the ongoing entry of global players. At the same time, the pandemic has quickened the digital transformation of the industry and accelerated the integration of digital tools into our daily work.”
Still, the pandemic continues to limit international — and to some extent domestic — travel, so the ability to provide on-the-ground and local insight has become even more paramount, according to UBS’s Lin. “Those sell-side research analysts who are able to offer information advantage will likely draw a bigger audience,” he said.
This year, investors have two favorite Chinese research providers, once again recognizing CICC while also elevating UBS to the No. 1 spot in Institutional Investor’s twelfth annual All-China Research Team. The two firms share the top spot based on the votes of more than 2,800 investment professionals representing 950 institutions with significant Chinese securities holdings.
Huatai Securities, which tied for first last year, has fallen to third place in the ranking, which combines the votes of domestic and international investors. BofA Securities repeated its fourth-place finish and Morgan Stanley, unranked last year, cracked the top five.
In this year’s survey, investors were invited to rate sell-side firms across 30 sectors. These responses were weighted by each voter’s Chinese equity assets under management to produce the overall leaderboard. An analyst-based leaderboard was also calculated based on votes for the best individual researchers. In this ranking, CICC regained the No. 1 spot, followed by UBS in second and last year’s winner Huatai Securites in third.
Additional leaderboards recognize the different perspectives of domestic and international investors. The mainland ranking mirrored the overall results, with CICC and UBS tying for first place followed by Huatai Securities in third. BofA Securites placed fourth in this ranking, while BOCI Research rounded out the top five.
International investors, meanwhile, once again recognized UBS as the top firm. CICC was the highest-ranking domestic firm, jumping one spot to share second place with BofA Securities. Morgan Stanley and Citi took fourth and fifth, respectively.
Wensheng credited CICC’s success to a strategy of delivering top-tier research for both mainland and international investors. “As a research platform, CICC cherishes both its Chinese roots and international reach. We publish our research in both English and Chinese to service our domestic and international clients,” he said. “We have a higher proportion of overseas clients than our domestic competitors. And when compared to our global competitors, we are situated much closer to the Chinese market and offer more grounded research on China’s macroeconomics, industries, and companies.”
However, meeting the needs of both international and domestic clients has become more challenging as their demands begin to bifurcate, according to Lin. “A year ago, both international and domestic focused on the pandemic,” he said. “However, since then, we have observed some divergences. International clients continued to look at China from top to down, focusing on macro recovery post-pandemic and the impact of regulatory drives. In contrast, domestic clients are adopting a bottom-up approach on some industries such as renewables and technology where there are unique investment opportunities.”
Differentiating the research offering at UBS remains key, according to Lin, and is bolstered by the fact that the firm is the first foreign full-licensed JV securities firm in China. UBS is also continuing to expand its China stocks coverage and thematic research ability through the launch of UBS China 360 Research, covering themes such as the future wireless earphone, green hydrogen, ESG, and China REITs.
Looking forward, CICC sees the country’s “green transition” as both a challenge and a significant opportunity. Last year, the firm published “The Economics of Carbon Neutrality,” a research compendium that offers a comprehensive overview and deep analysis of the macroeconomic and industrial impacts of China’s dual carbon objectives. that was popular domestically. An English version is now underway.
“Although China’s economy is still facing some uncertainties, it remains on a path of steady growth,” Wensheng said. “China remains one of the most dynamic and exciting markets globally, offering some of the best growth opportunities.”
For sell-side research providers, success depends on taking into account these market realities “while constantly innovating and adjusting,” he concluded.