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.
But there are bright spots, according to Peng Wensheng, head of the research department at China International Capital Corp. He 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.