China's economic transition toward more consumption will likely feed investors' interest in consumer-related stocks listed on the Chinese mainland next year.0
The rising share of services and consumption has contributed to growth of the world's second largest economy. "The Chinese economy will continue to slow next year and investors will have to look at the ongoing economic restructuring and policy supports for opportunities," said Gao Ting, a China equity strategist at UBS on Monday.
In a market where earning ability does not factor much into investors' stock picks, the consumption story could emerge as something investors will turn to as they strive to make their portfolios comprise more consumer-related stocks.
Such strategy is justified by the rising share of service in China's GDP and urban residents' income levels. Service now accounts for around 50 percent of China's GDP. The share of urban residents earning more than 100,000 yuan a year has also risen from 12 percent in 2010 to an estimated 34 percent by the end of this year and will continue to expand to 65 percent by 2020, UBS research shows.
"Even within consumption, we are seeing more growth in discretionary spending and this owes very much to rising income levels and urbanization," Gao said.
Accordingly, the share of food and clothing has shrunk while expenditure on items such as entertainment, education and housing has taken up more than half of total consumption.
Stocks in the consumer discretionary sector such as medical care, insurance and media will benefit from this trend, Gao added.
Loose liquidity will continue to support China's stock market next year, but Gao said the market is still subject to volatility as concern over credit defaults could weigh on investors' sentiment The Chinese regulator over the weekend said that they will introduce an circuit breaker in trading of stocks next year to help ward off the kind of huge volatilities that wiped out trillions in the market.
Authorities are also making amendments to its Securities Law and has been reported by domestic media to roll out a registration-based IPO system to replace the current approval-based offering as early as march.
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