Phase 1: A storm in Wuhan

Coming into 2020, eyes were on the China/US trade dispute after a volatile 2019. The Chinese equity market started off optimistically after a partial trade deal; markets were buoyant, rising by almost 5%.

Not until late January did investors start to appreciate the developing pandemic at the centre of the country. While developed markets dismissed it as a Chinese domestic storm around Wuhan (like SARS years earlier) Chinese markets fell by 15% from their January peaks. From a global perspective the real concern was the disruption to supply chains. At one point Jaguar Land Rover even flew parts to the UK in suitcases!

Phase 2: The global spread of COVID-19

In February, the world saw the virus spreading, but no one really knew what the consequences would be. The impact on some industries like restaurants, airlines and entertainment venues was predictable. On the other hand, e-commerce and online gaming were significant beneficiaries of the lockdown. We remember asking multiple investment managers what happens if the world temporarily shuts for business. No one had a clue!

The free fall of global markets started mid-February and lasted for a month. Chinese equities fell 20% during that period, while other major markets slumped 30-40%. However, for the Chinese there was good news from ground zero in Wuhan. Incremental COVID-19 cases across the nation had declined to fewer than 100. Life was starting to return to normal – even the shutdown of Wuhan was being eased.

By early March over half of Chinese businesses had resumed operations. In Shanghai, most businesses had returned to regular hours with more than 2/3 of worker back at work. Manufacturing PMI returned to the expansionary zone and fixed asset investment was propelled by infrastructure projects.

The unique way the Chinese system operates certainly helped manage the virus outbreak. Western countries don’t have the capability or political will to implement extreme lockdowns or the surveillance systems to follow the movements of their people.

Stock markets started their V-shaped recovery as governments stepped in to deliver unprecedented fiscal and monetary policy. This lasted until the end of the year and surprisingly many equity indices ended the year higher than the start despite the pandemic.

Chinese equity markets significantly outperformed most other stock markets. Whilst the recovery in developed markets was primarily driven by growth stocks the recovery in China was broad across all sectors. The Chinese track and trace system is rigorous with clampdowns and mass testing of any neighbourhoods with local virus outbreaks. Chinese A shares also benefited from a local shareholder base that were feeling more optimistic and confident creating further positive momentum. This demonstrates how China A shares can add diversification benefits to global equities.

In the autumn there was a style shift towards “beaten up” value stocks with news of vaccine approvals. At the same time regulators turned their attention towards “big tech” ranging from social media in the USA, antitrust issues in the EU to Ant Financial in China.

The Chinese regulators stepped up the scrutiny of their tech sector with all eyes on Alibaba. They started by introducing rules to raise standards for online lending and shortly after the Shanghai Stock Exchange suspended the highly anticipated listing of Alibaba subsidiary Ant Financial, the largest fintech company in the world. New antitrust rules were brought in to curb anti-competitive behaviours like forcing merchants to sell exclusively on one e-commerce platform. This time the share price of Alibaba really collapsed along with other internet companies such as Tencent and Meituan. The prices recovered somewhat as they continue to deliver revenue growth, but it is clear the tone of regulation is unhelpful.

We believe that these regulations are inevitable, and there is more to come globally. The better technology companies should embrace these changes.

One remarkable theme in 2020 was the significant underperformance of value versus growth, with the exception of a few short periods. Going into 2021 we saw factor rotation starting to gain traction. It’s very difficult to predict whether this will sustain but as dispersion is at historical highs, we think it is prudent to ensure portfolios stay balanced and avoid significant bias to any style.