China’s Uneven Equity Rally Opens New Roads to Recovery

As China begins the year of the Ox, many investors are wondering whether another bull run is possible in 2021. Given that last year’s rally was extremely narrow, we believe many parts of the market still offer pent-up recovery potential.

Chinese stocks ranked among the world’s top performers last year. The MSCI China All Shares Index rose 33.4% in US-dollar terms, well ahead of the S&P 500’s 18.4% returns as China’s more aggressive response to COVID-19 aided the market. Better management of the pandemic, along with targeted policy measures, produced fewer sporadic lockdowns, while exports remained resilient. As a result, economic activity bounced back sharply from the first-quarter contraction, and Chinese companies enjoyed a faster earnings recovery than developed market peers.

Growth Giants Dominated the Market

Despite headline returns, however, the market’s performance was heavily concentrated within a few names. Out of more than 800 constituents in the MSCI China All Shares index, the hypergrowth stocks of Alibaba, Tencent, Meituan, Nio and accounted for more than a third of total performance in the MSCI China All Shares last year. The top 10 stocks accounted for more than half of the index’s returns (Display, below).

A line chart plots the MSCI China All Shares 2020 rise, next to two pie charts showing the top 10 stocks portion of returns and index weight.

The trends echoed similar sector returns in the US. Internet and consumer-growth stocks adapted quickly to an evolving business environment, supporting earnings visibility that bolstered investor confidence. Increasing digitalization of work, shopping and leisure activities during the pandemic fueled returns for new economy stocks, much like in the US.