The year of the Ox

Ninety One addresses Chinese investment opportunities in the year of the ox.

As China’s recovery from Covid-19 front-runs other major global economies, during the year of the ox much will hinge on whether China can sustain its recovery and pull other pandemic-weakened economies out of their slowdowns. But China will set the pace in more areas than just economic growth over the next 12 months and beyond.

PHILIP SAUNDERS, CO-HEAD OF MULTI ASSET GROWTH SEES THE POTENTIAL FOR BIG CHANGE FROM THE TRANSITION TO A CONSUMPTION-LED ECONOMY. HE COMMENTS:

“China’s evolution into a fully developed economy based on domestic consumption is its biggest current challenge and , if successful, will radically re-orient the World economy and its markets. China had reached the end of the road of a bank financed economic model which was reliant on capital investment and exports as the sheer scale it has now achieved has become unsustainable. This transition to a consumption-led economy will require a dramatic ascent up the value chain, meaning a shift away from supplying western markets with high volume, low value added products, to the establishment of a broad array of local globally competitive producers and service companies – digital leaders such as Alibaba and Tencent already provide a glimpse of this future. Growth will be slower, but it should be higher quality and better in terms of returns to investors than the rapid growth of the past two decades.”

“US and China relations will also be key in the coming year, with the Biden administration set to continue the more adversarial approach adopted by Trump as opposed to the Obama administration’s more accommodating approach. In contrast to the erratic, “policy by tweet” style of his predecessor we can expect a much more thorough and methodical policy implementation conducted largely behind the scenes and in conjunction with allies. Common ground could be found in the area of environmental policy, and this would represent an important litmus test of Biden’s pragmatism. American companies have much to lose if they are increasingly shut out of China as a market. Paradoxically the United States’ more aggressive policies towards China have served to strengthen its reform momentum and spur growth in a whole series of areas, chief amongst which is technology.”

At a global level, the past year has powerfully demonstrated how important China has now become to global growth

“At a global level, the past year has powerfully demonstrated how important China has now become to global growth. China’s impressive record in dealing with Covid-19 and its consequent rapid economic recovery, has played a significant role in supporting global economic growth after the disruption caused by the rapid spread of the pandemic. Investors need to be paying far more attention to China’s impact on markets globally and the opportunities that are available in the country’s already substantial bond and equity markets which remain under-represented in investor’s portfolios”.

ALAN SIOW, CO-PORTFOLIO MANAGER OF NINETY ONE ALL CHINA BOND STRATEGY SHARES HIS VIEWS ON THE CHINESE BOND MARKET COMMENTING:

“Covid-19 has seen global central banks and governments engage in a synchronous monetary and fiscal easing that has exacerbated the scarcity of safe, decorrelating yield. At approximately $16trn in size, and a daily trading volume of nearly $30bln USD, the Chinese bond market is roughly the same size as the stock of developed market debt that is negative yielding in nominal terms. This is set within the backdrop of China having an orthodox monetary policy in contrast with much of the developed world at the moment. It is one of the last remaining markets of sufficient size, depth and liquidity with a positive yield that is still able to fulfil the traditional role of “fixed income” in a diversified portfolio. And thanks to still low participation by global investors, correlations to other risk assets are still low.”

“China’s importance in any investment portfolio stems from its existing and expected future prominence in global economic growth and trade. Even as headline GDP growth is expected to slow, China will remain a key driver for both emerging market and global growth. Furthermore, the country’s inclusion in the Bloomberg Barclays Global Aggregate, FTSE Russell, JPM Morgan GBI-EM Global Diversified indices cannot be ignored. As phased inclusions continue, it is expected to drive a further $150-200bn of flows.” “While onshore Chinese fixed income markets are now well and truly open, investors’ mileage may vary. There is already an attractive case for the upper echelons of Chinese fixed income – government and policy bank bonds. But other parts of the market, corporate credit for example, are clearly at an earlier stage of development and investors will need to be selective. The lack of credit differentiation and discrimination in the pricing of private credit will take some time to develop and mature and will be accompanied by defaults and potential disruption.”

“In contrast, the offshore USD credit markets offer a distinct and compelling risk reward profile that deserves its own place at the table versus other global credit asset classes and is seen as a useful complement until both markets eventually converge in the future.”

WENCHANG MA, CO-PORTFOLIO MANAGER OF NINETY ONE ALL CHINA EQUITY STRATEGY, POINTS TO STRUCTURAL DRIVERS WITHIN THE CHINESE ECONOMY AS WELL AS MATTERS OF SUSTAINABILITY AS PROVIDING OPPORTUNITIES FOR INVESTORS, COMMENTING:

“Growing disposable income and the rise of a middle class is one of the strongest structural drivers of growth in China. The size of the population with over US$10,000 annual disposable income is expected to grow from 280mn to 680mn by 2030. As a result, China’s consumption market is expected to double in size and reach a scale similar to the US. Chinese brands are capitalising on this opportunity, with strong national brands such as Midea and Haier emerging in China, gaining market share both domestically and abroad.”

“Decarbonisation and a sustainable transition also present a significant opportunity for investors. With the launch of its ambitious 14th five year plan this year, committing to peak carbon by 2030 and carbon neutrality by 2060, the plan presents significant growth potential for leaders in the EV and renewable energy supply chains such as CATL and Xinyi Solar. The national carbon trading scheme is also expected to be rolled out this year,

Growing disposable income and the rise of a middle class is one of the strongest structural drivers of growth in China

starting with power generators, and gradually including other high emitting industries. The scheme could be an important part of China’s path to its carbon neutrality target, and should serve to encourage investment into higher efficiency and more advanced green technology.”

“Representing the second largest economy and the second largest equity market in the world in terms of market cap, with a strong IPO pipeline for 2021 set to bolster this further, Chinese equities represent a strategic asset for long-term allocation. There are significant drivers for growth present across the Chinese market, yet Chinese equities are still under-represented in global investors portfolios. Rising domestic consumption, a green transition, and continued economic and capital market reforms are set to open up the opportunities even further, trends all captured by Ninety One’s 4Factor Chinese Equity Strategy.”

CHARLIE DUTTON, MANAGER OF THE NINETY ONE ASIA PACIFIC FRANCHISE STRATEGY SEES EXCITING INVESTMENT OPPORTUNITIES IN ASIA, PARTICULARLY THROUGH THE REGION’S LEADERSHIP IN TECHNOLOGY. DUTTON COMMENTS:

“The Covid-19 crisis has reinforced key trends that were already present in Asia, in particular the acceleration of digitalization and the related productivity gains, for example through social media, e-commerce, and cloud implementation.” Looking ahead, the region’s leadership in technology is creating some exciting investment opportunities. For example, Asia is increasingly dominating the semiconductor industry, and with indications that Intel is reducing its investment in logic chip manufacturing, it looks like TSMC and Samsung could be left as the market leaders here.

What’s more, local brands are asserting their dominance, offering investors the opportunity to get exposure to the dual trends of rising consumption in the region, and the growth of the premium market. This rise in quality is one of the key opportunities emerging in China and across the region more broadly. Back in 2007, there were just 100 stocks in Asia which fit our quality criteria, this has now increased to 300.

The Covid-19 crisis has reinforced key trends that were already present in Asia, in particular the acceleration of digitalization and the related productivity gains

And with countries such as China expected to have surpassed the US in R&D spend last year, this high level of investment is driving the development of local healthcare providers, and creating some standout global leaders - particularly for more niche health products.”

More insights on the theme of China, and other structural thematic drivers such as debt, climate change and technological change can be accessed through Ninety One’s Road to 2030 platform.