UBS – The Chinese stock market has developed at a rapid pace over the last few years. According to the People’s Bank of China, capital spending on foreign investors has increased by 50 percent between 2016 and 2017, to more than one trillion renminbi. In addition, there are profound economic reforms that offer a variety of attractive opportunities – especially in the health sector. But inclusion in the MSCI Emerging Markets Index in June will also be exciting for investors.
Already 2017 was a strong year for shares from China. Economic output developed better than forecast. For more than twelve months many companies have been revalued and are moving up in the rating. And rightly so, because some companies were able to increase their profits considerably. In 2018, valuations will continue to develop appropriately compared to fundamentals. However, compared to previous years, fundamental valuations are lagging behind the current uptrend, and we see first signs that this will change in the current year.
Health in focus
In the course of this development, special attention should be given to the « New Economy » sectors, above all the healthcare sector. In addition to economic and political developments, these segments have their own fundamental growth drivers, because China is also undergoing social change at the same time.
On the one hand, according to the World Health Organization (WHO), health spending increased fivefold between 2004 and 2014, greatly boosting the industry. On the other hand, the population is steadily increasing their spending on medical aid. Increased income and healthcare opportunities have increased the volume of medical spending from the private sector by 16.4% per year between 2005 and 2014, according to the WHO. According to estimates by the United Nations, the number of over-65s will rise from 4.2 per cent to more than 245 billion between 2015 and 2030 at an annual rate of 4.2 per cent, making them the largest population in the world.
Broad investment universe
Developments in the health sector in particular offer investors numerous investment opportunities. Rising healthcare spending plus increasing aging are fueling a boom in corporate R & D. The competition is massive, and in the end, innovation is the deciding factor. In 2015 alone, Chinese companies filed 855 new pharmaceutical patents. This is an increase of 151.4 percent compared to 2007 and even exceeds other global markets. In view of the current reforms to facilitate patent approval, we also expect a continuously strong pipeline of innovative products in the future.
Increasing corporate governance efforts help investors understand the complexity of the Chinese stock market. Overall, however, the quality of companies is currently higher than before, supporting the positive outlook for sustained performance over a long-term horizon.
Finally, investors will be granted access to 222 A shares of blue chip companies through the inclusion of China in the MSCI Emerging Markets Index in June. If the market does not already experience a significant upswing as a result of the above-mentioned developments, this measure will probably provide a strong boost if foreign investors increase their capital investments.