China Sector Report: Q3 2020
The Global X China Sector Report: Q3 2020 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 third quarter of 2020, China’s economic activity expanded from the manufacturing sector into service and retail-driven sectors as lockdowns eased and consumer confidence rose. After many were able to return work, and others continued to adjust to working from home, consumers began to spend more with their incomes and confidence restored. China’s restrained reopening has meant that many Chinese workers continue to live much of their lives online while demand for discretionary good continues to recover. While many analysts have reduced their forecasts for China’s growth this year because of the bumpy recovery, China is still the only major economy forecasted to exhibit positive growth in 2020, contributing to strong equity market performance.
Within China, all of the eleven major economic sectors in China generated positive equity returns in Q3 2020, with the exception of the Financials sector. This is consistent with Q2 performance, when all but the Energy sector generated positive returns. But both Q3 and Q2 stood in stark contrast to Q1, when all 11 sectors plunged amid the initial COVID-19 outbreak. In terms of contributions to overall returns in the MSCI China Index, the Consumer Discretionary sector played the greatest role, as China’s economic recovery encouraged consumption of goods and services.
Source: Bloomberg as of Sep 30, 2020
Performance shown is past performance, based on the NAVs of the underlying sector ETFs and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. To view standard 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. For performance data current to the most recent month end, please call 1-888-493-8631, or visit www.globalxetfs.com.
Dispersion between China and US Sectors Normalizes
In Q3, the MSCI China Large Cap Index and the S&P 500 Index continued to rally, ending the quarter up 11.6% and 8.9%, respectively.
During Q3, Chinese sectors for the second time this year exhibited less dispersion of returns compared to US sectors, which deviates from historical patterns. Sector dispersion is the difference between the best and worst performing sectors in each country. In China, this dispersion was 30.71% in Q3, whereas in the US it was 34.72%.
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. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted.
Consumer Sectors Drive Performance
During Q3, the Consumer Discretionary, Materials, and Consumer Staples sectors outperformed their broad market indexes in both China and the US as consumers became encouraged by a recovery as economic activity increase and jobs restored. Within consumer sectors, e-commerce companies contributed positive gains in both countries with consumers increasing their reliance on online platforms to make personal purchases and order home food delivery amid tenuous reopening efforts.
Another strong area in consumer spending in the US and in China was automobile retail, which enjoyed a recovery after a particularly difficult first half of the year. And whereas the performance of the Consumer Discretionary in the US was also led by the home improvement sub-segment, the Chinese sector benefit from a continued growth of online education platforms, with students remaining with parents working from home.
Despite the positive performance in both countries, China’s Consumer Discretionary sector more than doubled the returns of its benchmark because of strong performance throughout the sector, while the US sector only outperformed its benchmark by just over 1%. China’s travel service companies performed notably well heading into the October 1st – 8th national Golden Week holidays, one of the biggest travel weeks of the year. Leading up to the event, hotel and airline bookings were above those seen prior to the pandemic last year. According to Alibaba, hotel bookings for the week were up by more than 50% compared to the same period in 2019.1
China Sector Underperformers
Sectors that underperformed the broader markets in both the US and China include Financials, Health Care, Real Estate, Utilities and Energy.
China’s Financials sector experienced slightly negative growth in Q3, underperforming the MSCI China Index by roughly 11% amid fears of the sector becoming overleveraged and the reemergence of shadow banking.
China Health Care’s recent slowdown may be attributed to its strong performance during earlier quarters this year, as the sector was up 37.13% year to date (YTD) – more than double the MSCI China Index’s returns.
Although the Energy sector began demonstrating a strong recovery in Q2, the sector underperformed during Q3, as oil prices remained range-bound at low levels.
COVID-19 continues to reshape the global economic outlook with performance across global markets, including major economies like the US and China. Sectors are impacted by this uneven recovery in uneven ways and over the past several quarters, have divergence significantly in performance. And as we’ve seen throughout this year, mixed economic responses to and recoveries from COVID-19 create a bumpy recovery, elevating the importance of monitoring and adjusting sector exposures to China.