Experts predict strong year for A shares as China recovers from COVID-19

China's ongoing recovery from COVID-19 and its strong growth potential has supported foreign market watchers' optimistic outlook on A-share market performance this year.

In"10 Surprises of 2021" by investment firm Blackstone released at the beginning of the year, Vice-Chairman Byron Wien and Chief Investment Strategist Joe Zidle of Blackstone agreed that A shares will lead emerging markets higher this year.

Steven Sun, head of research at HSBC Qianhai Securities Ltd, wrote in the organization's China Equity Strategy 2021 that the Shanghai Composite Index is likely to hover around 3800 points when the year ends while the Shenzhen Component Index should approach 16000 points. The blue-chip focused CSI 300 Index is projected to finish the year at around 5500 points.

The auto, brokerage, light industry, mechanical equipment and transportation sectors are favored by HSBC Qianhai analysts this year.

Under the dual-circulation strategy, China aims to develop a large domestic market while also focusing more on value-added exports. Continuing urbanization and large-scale commercialization of emerging technologies in China are set to drive sustainable growth for the consumer, technology and high-end manufacturing sectors. Therefore, there will be six major investment themes for the A-share market in the long run－new consumption, diversified consumption, healthcare, industrial supply chain upgrades, core technologies and clean energy, Sun said.

Global financial services provider Credit Suisse expects China's A shares to continue performing well in 2021 despite some volatility arising from uncertainties in vaccine development, monetary policies and geopolitical risks. The company expects the CSI 300 to be around 5600 by the end of the year.

Edmond Huang, head of research at Credit Suisse China, said that investment styles in Chinese equity markets this year will rotate from a focus on growth to an emphasis on value creation－a trend that has already been set in motion with the development of promising vaccines.

"Given that China is already on track for recovery, we will likely see a less volatile shift between styles and sectors. Looking forward, we expect more upside for Chinese equities," Huang said.

In view of a further recovery in 2021 and rising regulatory and stimulus exit risks, more "old economy" sectors will benefit from a late-cycle recovery, particularly industrials, consumer discretionary goods, information technology and financials, he added.

UBS expects the CSI 300 will rise 13 percent this year under optimistic scenarios. While Chinese households allocated about 17 percent of their assets to equities, funds and insurance in 2020, the rate will gradually increase over the next few years, with the rate expected to hit 21 percent in 2025. Household assets' increased exposure to stocks will help to elevate the A-share indexes, said Wendy Liu, head of China Strategy at UBS Global Research.

Liu said central regulators' tighter grip on property market speculation, stricter regulation over shadow banking products, protection of individual investors and the improved quality of listed companies will also help to elevate Chinese interest in the A-share market, thus pushing up the indexes.

Nicholas Yeo, head of China equities at Aberdeen Standard Investments, confirmed the positive outlook on the improved profitability of Chinese companies this year, thanks to the earlier recovery of the country's economy. Structural growth impetus from consumption, new technologies and green energy will further boost A-share market performance this year, Yeo said.

Given China's steady GDP growth, industry giant BlackRock said in its 2021 investment report that the country is a "distinct pole of global growth" and also "an investment destination separate from emerging markets".

Holding a similar opinion is Wang Qian, chief Asia-Pacific economist at Vanguard Investment Strategy Group.

Wang said the domestic market is the major engine of China's economic growth. As a result, China's economic cycle is not fully synchronized with the rest of the world. The relatively low correlation is conducive to diversified investment, which is also one of the major reasons for Vanguard's continued optimistic outlook on the Chinese market. For the next decade, Vanguard predicts average returns on A-share investments will be 6.3 percent.