20 Nov 2023
My next meeting was with Ernest Yeung and Haider Ali who manage the T.Rowe Price Emerging Markets Discovery Equity Fund. The investment approach is differentiated in that it is prepared to look through a whole cycle and is value oriented - not deep value but looks outside the quality growth bucket focused on by many fund managers. The fund focuses on forgotten names rather than highly controversial ones where the earnings trajectory can change in a positive way and argues that average companies which are improving can give excellent returns to investors. The managers are backed up by the T.Rowe Price analyst team, so are not working in isolation.
An interesting name added to the portfolio has been Alibaba, which was purchased in the third quarter of 2022 after several years of severe stock underperformance post management change which saw the new team embark on cost cutting, share buybacks and asset sales, taking a different approach to deliver shareholder value. The semiconductor industry has always been a cyclical one and last year when fears grew about a US recession, there was an opportunity to buy into SK Hynix when its margins fell to a 20-year low. The team are now looking to increase exposure to China as the market is super depressed. The fund has taken some exposure to the property sector including KE Holdings which is the Rightmove of China and state-owned housebuilder China Resources Land. The team at T.Rowe have built up a strong record and the portfolio has a very differentiated stock list compared to most in the sector so provides good diversification.
The next day I met up with a long-standing contact Nicholas Yeo, who is Head of China at abrdn. Nicholas has always provided very useful insights into China and at the meeting discussed what he referred to as the 3Ps: pace, property, and policy, which are driving the Chinese economy for better or worse.
China moved away from the zero Covid-19 era rapidly and unexpectedly which led to initially high levels of optimism as the economy reopened. During the pandemic in China there were no handouts and ideologically Nicholas Yeo explained that President Xi was not in favour of giving money to people for consumption, so unlike the US and Europe, there were no handouts. The property market continues to grab headlines, but Nicholas explained that the property bubble burst back in 2017.
The recent Golden Week holiday in China showed a sharp increase in tourism and travel compared to a year ago, but spending is still lower than 2019 levels and travel outside the country remains limited with visa delays. The savings rate has risen in China as the population have become more cautious on the economic outlook. The housing market is clearly depressed but Chinese home buyers are not leveraged as high levels of downpayment are necessary before purchasing a home, so the situation is very different from the US subprime crisis which occurred in 2007. In tier one cities, real estate values have shown signs of stabilisation with the biggest problems of oversupply in smaller towns and cities. There has been a reclassification of what constitutes a second home in China, allowing lower mortgage costs for those trading up to a bigger property. The pace of Chinese recovery post Covid-19 reopening has disappointed, but Nicholas believes there are now signs of stabilisation.
When it became clear that the Chinese economy was not going to see a western style post-Covid-19 bounce, the market had expected a big bang approach by China to boost the economy. However, the current leadership is focused on deleveraging the economy and does not want to use debt to boost growth. Stimulus by the authorities in China has been on a gradual piecemeal basis and is likely to continue in this vein. Over the medium term, Chinese consumers are likely to continue to prefer better products and spending money on experiences and China is still more progressed in digitalisation than the West, remaining well placed in areas such as renewable energy, batteries, and electric vehicles. Overall, Nicholas was cautiously optimistic that the economy was finding a bottom and with sentiment depressed, interesting investment opportunities were still present.
I then met up with the new Head of China at Allianz Global Investors, Shao Ping Guan, who has 17 years’ experience specialising in the Chinese market and joined from Goldman Sachs Asset Management. He will manage a number of China mandates including the All China Fund. Shao Ping believes that the country is at a crossroads as the economy has gone through the stage of driving growth through the build out of infrastructure, together with other forms of debt financed expansion. Now, with urbanisation of at least 70% and a comprehensive infrastructure system, China will need to find different drivers of growth going forward. The authorities in China continue to want to reduce leverage in the system, so are not going to spend on wasteful infrastructure projects. Shao believes that China will tackle its debt to GDP problem by growing the denominator through service sector expansion. Manufacturing will continue to be upgraded with the use of robotics and biotech pharmaceutical is another growth area, together with new energy vehicles. The current slowdown in the property sector can be offset by upgrades to manufacturing and encouragement of further digitisation and use of the internet in the service sector.
Some economic fundamentals in the country remain strong with China having a trade surplus of $850bn which is equivalent to the GDP of a medium-size country. China is extremely well placed in the EV sector, being the biggest exporter of cars and its strong position is not just through lower cost labour but also due to innovation. Shao Ping recognises that exports will be constrained by continued geopolitical tensions, together with re-shoring by multinationals. China is well placed in certain globally strategic industries such as electric vehicles and autonomous driving and Chinese people, by their nature are entrepreneurial, demonstrated by the rise of Shein in fast fashion.
Within portfolios, Shao Ping has added to names in the auto supply chain and has put more electric vehicle exposure into the fund, while looking at some depressed sectors such as steel and materials, home furnishing and appliances. Shao Ping believes that the authorities have recognised that the internet sector is required to create jobs as the entrepreneurs behind these companies need to return to investing in the country. The fund has increased exposure to names such as Tencent, Alibaba and Meituan. With the market trading at depressed levels, Shao Ping believes that there are opportunities for stock picking driven managers in the Chinese equity market.
The next day took me to Jardine House located at 1 Connaught Place Central. The house has been in the ownership of the Jardine family and trading companies since it was built in the early 1970s when it was then the tallest building in Hong Kong and Asia. Its top floor is 168.5m in height and is noted for its circular windows which has given it the neat name amongst locals of ‘The House of a Thousand Arseholes’.
The building was the location for a meeting with the new CIO of Hong Kong and China at Invesco, Raymond Ma, who worked at Fidelity for many years and set up the original China Consumer Fund there. After a brief spell outside of the industry, he has now returned to work full time in Hong Kong and believes investment opportunities can be unearthed by looking at value chain coverage in three key areas of green, EV and industrials. This is in addition to traditional sector coverage and seeks to add another dimension to the opportunity set. For instance, within the EV chain, there can be battery makers, chip makers and component makers as well as the actual car manufacturers. Within solar, there can be upstream and downstream members of the supply chain. Raymond is looking to get his analyst team to identify where the best profits are being made and invest there.
Raymond added as a growth investor he is looking to identify stocks with the best growth prospects. After China joined the WTO in 2001, exports drove growth and to facilitate this, there was heavy spending on infrastructure. This favoured banks and certain infrastructure businesses. In 2010, consumption was only 36% of GDP and was expected to grow strongly over the next decade and so Raymond launched a consumer-focused mandate, but today consumption is more of a problem due to the higher unemployment rate and slower GDP growth. Exports have been hurt by geopolitics and reshoring, but several businesses in China have now gone overseas in their operations looking for growth. Raymond expects the traditional and historic growth drivers in China will be lacklustre over the next decade but businesses able to expand overseas and utilise expertise gained in the home market will be successful. He added that companies at home with high market share are looking to become multinational in nature and often have lower costs than traditional western businesses. For example, Fuyao Glass has a 70% market share at home and has set up glass factories in the US, while Midea has expanded overseas with its air conditioner products. In the auto supply chain, China will be able to supply components for local assembly which Japanese companies have achieved in the UK to avoid tariffs and trade tension conflict. Raymond believes that components for battery and electric vehicles will be cheaper than those made solely in Europe and the focus for the Invesco China Fund is on identifying where the value chain within an industry is occurring.
Raymond also argues that Chinese companies can help the world on its green transition. Electric vehicles will need more high voltage charging points at say 800v versus 240v and energy storage will also need higher voltage and China owns much of the green industry supply chain. One advantage China has is the more abundant supply and cheaper cost of engineers working within businesses. Areas of the market Raymond is avoiding are those with over capacity such as businesses operating in noodles and beverages where competition is now intense.
In summary, Raymond believes that over the next decade, China will see different trends from the previous ten years as it transforms and while there is overcapacity in many sectors at home, innovative companies will be able to grow profits through overseas expansion utilising the skill set learnt in the fiercely competitive domestic market.
Before the weekend flight back, there was an opportunity to visit the Man Mo Temple which is one of the oldest in Hong Kong and dedicated to the God of Literature. The temple was built in 1847 and is fascinating to look around if you can cope with the overpowering smell of incense inside. There are four gilt plaques dating from the period when the temple was built. The temple is a fine example of traditional Chinese vernacular architecture and is exquisitely decorated inside reflecting superb traditional craftmanship.
The return flight on Sunday evening was not without incident as the expected typhoon hit Hong Kong and saw alert levels progressively raised to 9 which usually sees flight cancellations and the suspension of public transport. Despite the inclement weather, the plane took off only 45 minutes late, but there was certainly plenty of turbulence, so I returned home - as James Bond would put it - shaken but not stirred.
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