China Sector Report: Q1 2021
The Global X China Sector Report: Q1 2021 can be viewed here. The report provides macro-level and sector-specific insights across the eleven major economic sectors in China’s equity markets.
In the first quarter of 2021, China’s economy remained resilient, with economic activity continuing to build momentum after four quarters of expansion. After reaching its highest level in over two years, industrial output began to normalize while trade data continued strengthening and consumer prices rose above pre-pandemic levels. Recent IMF forecasts expect that China will grow 8.4% this year as the economy should experience a protracted recovery throughout 2021.
Within China, eight of the eleven major economic sectors generated positive returns in Q1 2021, with Consumer Discretionary, Consumer Staples, and Information Technology being the only negative performers. This differs slightly from the last three quarters of 2020, where ten of eleven sectors were positive. In terms of contributions to overall returns in the MSCI China Index, the Communication Services sector played the greatest role, as China’s economic recovery continued to be powered by companies allowing people at home to stay connected.
Sectors that underperformed the broader markets in both the US and China included Info Tech, Consumer Discretionary, and Consumer Staples. China’s Info Tech sector experienced negative growth in Q1, underperforming the MSCI China Index by roughly 10% amid fears of the sector may have overheated and greater scrutiny on the tech sector from Beijing.
Meanwhile, Consumer-facing sectors underperformed their benchmarks, but only after outperforming the broader market for several quarters – suggesting that the underperformance in China resulted from profit taking.
Source: Bloomberg as of Mar 31, 2021
Performance shown is past performance, based on the NAVs of the underlying sector ETFs and does not guarantee future results. To view standard and month-end performance each of the funds, please click on the links available under “Related ETFs” below this post.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. High short-term performance of the fund is unusual, and investors should not expect such performance to be repeated. Returns for periods greater than one year are annualized.
Dispersion between China and US Sectors Normalizes
In Q1, the S&P 500 Index (SPX) continued its rally, finishing up 6.17%, while the MSCI China Index (MXCN) was mostly flat with a -0.16% return.
During Q1, Chinese sectors exhibited a narrower dispersion of returns compared to US sectors. Sector dispersion is the difference between the best and worst performing sectors in each country. In China, this dispersion was 21.47% in Q1, whereas in the US it was 29.14%. While sector dispersion is typically higher in China than in the US, wider dispersion in the US was mainly attributable to the strong recovery in the Energy sector as markets shifted from growth to value amid rising long term rates.
Comparing and Contrasting US and China Sector Performance
In the chart below, we show performance of Global X ETFs that are designed to track China’s 11 GICS sectors, as well as their US sector index counterparts.
Performance shown is past performance, based on the returns of the indexes that the sector ETFs track and do not guarantee future results. Index returns are for illustrative purposes only and do not represent actual fund performance.
Commodities Fueled Energy Outperformance
During Q1, most sectors outperformed the MSCI China Index as the Chinese economy experienced a persistent recovery. The largest contributions to returns in China were from the Communication Services, Financials and Real Estate sectors as people continued to stay at home while housing prices rose and new loans nearly doubled.1 While the Energy sector was the top performing sector in both China and the US thanks to higher commodity prices globally, returns were much higher in the US Energy space thanks to its position as a major global oil producer and a rise in oil prices during the first quarter.
Following a year-long battle with COVID-19, the pandemic continues reshaping the global economic outlook, resulting in mixed performance across global markets. Sectors across major economies, including the US and China, are experiencing uneven recoveries and diverging with their historical performance. Throughout 2021, we expect global markets to continue recovering with varied economic responses to the pandemic and anticipate that investors may benefit from more selective sector exposure.