Two Reasons China Outperformed the Global Market in COVID-19 Recession

When a pneumonia of unknown cause was first detected in central China’s city of Wuhan in November 2019, no one expected that this virus, later named COVID-19, would become a global pandemic that infected as much as four million people and caused over 300,000 deaths in half a year[1]. The deadly coronavirus not only posed a big threat to the world public health system, but also grinded entire economies to a virtual standstill. To prevent the spread of human-to-human infections, world leaders locked down counties and cities, closed the factories and restaurants, and issued travel bans and social distancing policies, which in turn, brought the global economy to a recession.

As the initial epicenter of COVID-19, China paid a heavy price for the strict containment measures, suggested by the GDP readings of -6.8% YoY contractions in Q1, a historical low since the figure started publishing in 1992[2]. Fortunately, with the initial success in containing the virus, China is now getting back on its feet while much of the rest of the world is struggling with soaring death tolls and floundering economies.

We see signs indicating that China is the first major economy to emerge from the disruption. Though challenges remain as the strong interconnection between China and the shrinking world economy makes it impossible to stand alone, we believe two drivers, namely China’s lead in virus containment and substantial, targeted, but more measured supportive policies, are propping up an umbrella for China under the global economic downpour, while the US economy probably would not fully recover until Q4, 2021[3].

First In, First Out

Compared with the financial crisis in 2008, which started as a subprime mortgage crisis and eventually erupted into an all-out financial crisis, the coronavirus shock is more severe as the containment measures directly hit the real economy, including the global supply chain, oil consumption, company earnings, education systems, and people’s everyday life. Thus, the magnitude of the recession is not decided by the financial system but largely linked to the evolution of the virus and how long the containment measures need to be kept in place.

China has earned itself a high mark in the anti-coronavirus recession battle initially through virus containment. To curb the spread of the disease, China instituted unprecedented nationwide restrictions in late January and has only been eased in early March after President Xi Jinping visited Wuhan. 

For many other countries, in terms of containment policies, instead of employing China’s strict lockdown measures, softer social distancing measures were put in place. Admittedly, China’s strict measures pushed the economy to a halt in February, which is more punitive to near-term growth. However, it made China ahead of the world in getting out of the woods.

Substantial, Targeted, but Measured Policies                      

The frozen economy under the coronavirus prompted ever-increasing monetary policies and fiscal supports in major economies. The US took a lead to announce an interest rate cut, followed by unlimited, open-ended quantitative easing (QE), including the purchase of corporate and municipal bonds and a stimulus package with a $2.3 trillion price tag mainly to support the economy[4]

Although the generous supportive measures seem to bring some hopes of preventing an economic catastrophe, the trillions of dollars rescue package would push up budget deficits which is expected to widen to a historically high level. The rescue package approved by the US government so far is likely to increase the country’s fiscal deficit to 18% of GDP, the largest level since 1940s and could widen further to 24% of GDP if there is an additional $1.25 trillion stimulus[5]. While spending increase and tax cuts would further lead to a weaker government balance sheet, which becomes a heavy burden to serve its own population in the coming future.

China, on the other hand, is much more measured in launching supportive policies. Different from the intensive policies launched by the US policymakers shortly after the virus outbreak in March, China phased its policies into different stages, focusing on the specific major issues in each stage.

In the past few years, China issued special-purpose bonds dedicated to infrastructure spending. The quota for special purpose bonds was further expanded in March as part of a set of policies. Fiscal policies continue to be proactive to channel more affordable credit to the country’s 30 million small and medium-sized businesses (SMEs), which account for 60% of gross domestic product and half of tax revenue[6]. To help them withstand the financial hardships, the People’s Bank of China (PBOC) trimmed the reserve ratio for rural and small city commercial banks by one percentage point at the beginning of April, which freed up $56 billion of liquidity to SMEs[7].

In April, as the global spread of the virus negatively affected demand for Chinese exports, more stimulus, such as government-issued consumption vouchers, which can be redeemed at participating dinning, shopping, travel and recreational enterprises, is issued to trigger the domestic demand. There are signs of increased consumer confidence instilled by the massive issuance of government vouchers, suggested by the daily sales of major retailers rebound during Labor Day holidays, which witnessed a meaningful increase of 32% from Ching Ming Festival (A holiday in early April)[8].

Policymakers in China are more mindful to avoid deploying massive indiscriminate policies because of the negative consequences the world’s second-largest economy endured from the last round of stimulus during the 2008 Financial Crisis. With more targeted and disciplined policy supports this time around, we do not expect a rising tide lifts all boat phenomena in the Chinese equity markets. Given this case, investing in China requires careful and in-depth stock picking, as not everything in the market would bear a good return. For stock pickers like us, this would be a good backdrop to perform. We have concentrated our holdings in competitive and innovative companies led by experienced management teams, and so far this year, most have proven to possess a strong ability to weather the volatilities under economic uncertainties.

[1] Source: Johns Hopkins Coronavirus Research Center, as of May 2020

[2] Source: Business Insider, as of April 2020; China’s National Bureau of Statistics

[3] Source: Morgan Stanley Research, as of April 2020; Haver Analytics, NBS, Morgan Stanley Research estimates

[4] Source: CNBC, as of April 2020

[5] Source: Morgan Stanley Research, as of April 2020; BEA, Federal Reserve, Historical Statistics of the United States, Morgan Stanley Research estimates

[6] Source: South China Morning Post, as of May 2020

[7] Source: Bloomberg, as of April 2020

[8] Source: Credit Suisse, as of May 2020; Ministry of Commerce


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

Zeal Asset Management Wins Two Awards in 2017 BENCHMARK Fund of the Year Awards – Fund Manager Q&A

“Our emphasis is to capture long and short opportunities while proactively reduce the downside risk against market beta.”

We are honored to announce that Zeal Asset Management Limited won “Best-in-Class House Award” under the category of Alternatives-Long/Short Equity1 and our CIO, Jacky Choi was named “Manager of the Year” under Greater China Equity Category2 in 2017 BENCHMARK Fund of the Year Awards (Hong Kong).

Jacky Choi sat down with us and answered two frequently asked questions about Zeal’s investment approach and strategy, as well as where the China market is heading next.

Q1: A highly-concentrated investment approach calls for high conviction ideas. How do you generate these ideas? Can you tell us your stop loss policy?

Yes, since we place a substantial part of our fund’s capital into each investment, it is very important for us to conduct deep dive research into all the positions to back up our high conviction. At any point in time, there are over 200 stocks that are closely and actively monitored by the investment team and we know the business and management of these companies thoroughly. Our conviction is built upon continuous coverage on these companies over many years and will invest in them when we deem the prices to be attractive. To find new ideas yet to be under our coverage, we perform quantitative screening regularly, parameters including balance sheet items, P/L items and market related items, e.g. sudden price movement or volume pick-up, etc. Finally, we also use qualitative methods to source ideas. For example, since we conduct more than 1,000 on-the-ground company research visits annually, when we meet with corporate management, investment ideas may arise when we are discussing about their clients, competitors, suppliers, and distributors. When we find initially interesting ideas, we will usually first conduct desk research, looking over annual reports of the company, followed by onsite visit to the company, and then we do our own financial modelling. After all this, if we have high conviction that the stock is vastly over or under-valued, it will go into our stock idea pool for our PMs put into the funds at their discretion.

As the portfolio is concentrated, it is important for us to have loss alerts. However, we do not have hard stop loss rules. The reason is due to the fact that we are operating in a volatile market and our experience tells us that having hard stop loss limit would sometimes result in getting out of a position at the worst time. Each alert will trigger an independent review of the investment case for the position in question by the original idea generator and another member of the investment team, and appropriate actions will be taken afterward. In practice, because the number of positions in the portfolio are not numerous, the investment team will easily spot if any position moves against us well before hitting the loss alert.

Q2: Would you say that your long/short strategy places greater emphasis on downside protection than capturing upside potentials? What is the rationale behind this strategy?

Not exactly, we would say that our emphasis is to capture the opportunities on both the long and the short sides while taking a more pro-active approach in downside risk reduction against market beta, and as a result, achieve risk adjusted returns. So it’s about the balance of upside potential with downside risk reduction and both are equally important. For our long/short strategy, we aim to provide our investors with a relatively stable return stream year after year.

The rationale behind the strategy is that as China is a relatively inefficient market and because a large disparity exists between the returns of the best and worst performing companies, we are able to seek alpha on both long side and short side. Most of our trades are not meant to be pair trades to capture relative returns but to generate positive alpha on both the long and short books. Through looking at the fundamentals of companies, we aim to find corporates that have a high visibility to deliver a steady or growing earnings over multiple years for the long book. On the other hand, for the short book, companies that will face structural difficulties in their businesses or have been so richly valued that any disappointment may cause a major correction. The Chinese markets have had periods of immense volatility and the short book has helped to reduce the magnitude of the ups and downs and also generate returns during very difficult years. At that the same time, the long book has been the major driver of returns in the portfolio and so the importance of which cannot be overstated, hence, the balance of upside potential and downside risk reduction is what makes the strategy successful in our view.

Q3: In the China market, what tailwinds and headwinds should we expect in 2018?

Some tailwinds that we expect is China will speed up reforms of state-owned enterprises (SOEs) in 2018 and beyond. We believe that SOE reform will gradually make SOEs become more profit-oriented rather than scale or top line-oriented. If SOE reform picks up the momentum, both Hang Seng China Enterprises Index and Shanghai Stock Exchange Composite Index will enjoy further re-rating since their valuations look undemanding. Besides SOE reform, we believe that the supply-side reform will continue on the back of seeing initial rewards. China’s economy has been reflating since late 2016 and we believe that supply-side reform has played a major role in this. Due to the fact that corporates are enjoying better profitability, banking assets are improving, and the public is enjoying better air quality through the cutting of overcapacity, supply-side reform enjoys wide public support and this will lead to continue robust nominal growth recovery into 2018.

Unlike last year where the market experienced exceptionally low volatility, we believe that the market will experience more volatility although we think the full year performance of the Chinese market will still be decent. Volatility will likely come from news surrounding US inflation and interest rates. While China’s CPI has mostly surprised investors on the upside over the past 2 years, CPI inflation in the US has mostly surprised on the downside. This is a curious situation since US imports a lot from China and should be importing China’s inflation, but this transmission seemed to have been severed in the past 2 years. We tend to believe that the transmission is only delayed but not severed and when the US sees more CPI inflation perhaps this year, expectations on the US rising rates would accelerate and this is generally negative for China. However, we would like to note that China has in part preempted the rise of US rates through the rise of its bond yield starting in late 2017. Therefore, the yield differential between China and US remains quite large and any initial rise in US rates should not materially decrease the yield differential although it would potentially still be negative for investor sentiment.

On top of that, lingering trade frictions could still be a near-term headwind, but its impact should not be exaggerated. We’ve noticed China’s policymakers have made economic stability one of their top priorities, re-emphasizing the need to maintain accommodative fiscal policy, neutral monetary policy, boost domestic demand and lower financial cost, amid mounting trade tensions with the US. We’ll continue to closely watch China’s policy developments and possible response measures.

1 Source: BENCHMARK House Awards is based on the qualitative methodology and tools determined by BENCHMARK, and reflects the performance data between 1 October 2016 to 30 September 2017.

2 Source: BENCHMARK Manager of the Year Awards is based on the fund manager’s ability in leading the team to outstanding performances over the consistency of three-year and five-year performance, against the benchmark and their peers. The award reflects the assessment by BENCHMARK with data between 1 October 2016 to 30 September 2017.


All comments, opinions or estimates contained in this Fund Manager Q&A are entirely fund manager’s judgement as of the date of this report and are subject to change without notice. In preparing this report, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice.