Chinese New Year

Saturday 25 January marks Chinese New Year – the Year of the Rat. In Chinese culture rats are symbols of wealth and with phase one of a US-China trade deal recently completed the Year of the Rat could live up to its name.

China’s population and dynamic businesses make it a compelling place to invest. To mark Chinese New Year, the Association of Investment Companies (AIC) has spoken to managers of investment companies investing in China about the US-China trade deal and the prospects for the nation’s economy. Their comments are below, along with observations from other specialist Asia managers about the opportunities in India, Vietnam and Thailand.

US-China trade deal

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “I maintained that China and the US would arrive at some semblance of a trade deal over the course of 2019 and markets had begun to factor it in valuations. This is far from an all-encompassing deal and investors will now look forward to a second round of agreements. I expect this will be a long drawn out process and it would be a positive surprise if round two negotiations reach some fruition over 2020.”

Growth slowing, but still significant compared to the West

Howard Wang, Portfolio Manager of JPMorgan Chinese Investment Trust, said: “In terms of the macro, China has been decelerating for a while, which actually happened ahead of the trade war really starting. However, with domestic policy support firmly in place, monetary policy has been able to stabilize credit growth from further deceleration and fiscal policy has turned towards more expansion.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “We have seen a clear slowdown in Chinese economic activity. While trade war uncertainty has clearly weighed on business sentiment, tighter credit conditions, especially around some of the so-called ‘shadow banking’ sectors has played a part in my view. The government is now more clearly on the front foot with increased actions to improve liquidity and support domestic demand. It is also key to reiterate that, even at this slower pace, the relative rate of growth we see in China remains significant when compared to the West. China is also maintaining the momentum in its plans of opening up its capital markets and the recent removal of the Qualified Foreign Institutional Investor quotas (QFII quotas) in September reflects this intention. There also remains considerable policy headroom in the economy to stimulate growth, and we have seen several approaches taken to lower borrowing costs in the economy.”

China – opportunities in insurance and technology

Howard Wang, Portfolio Manager of JPMorgan Chinese Investment Trust, said: “Our bottom-up stock selection reflects key long-term structural growth opportunities – we are finding them in the consumer, healthcare and technology sectors. Healthcare is a broad term in the Chinese context and there are opportunities in innovative pharmaceuticals making returns from R&D investments and in services and distribution companies. Technology is more than just smartphones and e-commerce. It includes software and renewable energy. And in the consumer sector, China is now the world's number one retail market.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “In terms of other opportunities for investors, the insurance sector remains attractive long term as the industry is still in its infancy; it is tied closely to the rise of the middle class and their propensity to protect wealth. Indeed, this is an overarching theme supporting consumption, which remains the biggest driver of growth in China.

“The technology sector continues to play a key role in enabling and creating new business models. Alibaba and Tencent are key players – their ecosystems continue to expand and will occupy an even greater share of the Chinese economy, including strong growth in financial sectors and cloud infrastructure.”

Thailand – home to fantastic businesses

Orsen Karnburisudthi, Manager of Aberdeen New Thai Investment Trust, said: “Economically and geographically Thailand is in the shadow of China but it certainly should not be overlooked. Long-term, Thailand is home to some fantastic businesses which provide goods and services in the domestic market and overseas. Domestically we currently see opportunities in retailing, healthcare and beverages while many companies are expanding regionally in areas such as basic materials, distribution and renewable power. The Thai economy is well placed to continue to capitalise on the increasing importance of Asia as a global powerhouse. Thailand’s strategic location and superb infrastructure means it is increasingly considered an alternative manufacturing and supply hub by companies around the world.

“Over the next few years, Thai companies are also likely to expand further into Cambodia, Laos, Myanmar and Vietnam, strengthening their presence in South East Asia, with many developing to become regional leaders in industries such as food, hospitality and tourism.”

Vietnam – growing fast

Andy Ho, Manager of VinaCapital Vietnam Opportunity, said: “Vietnam is a young and dynamic country of nearly 100 million people who are enjoying rising incomes and have greater choices for spending thanks to the significant levels of investment into modernising industries and the rapid liberalisation of its markets. The country has been recording some of the highest GDP growth of any emerging market, 7% in 2019 and 7.1% in 2018, and over the next few years GDP is expected to grow in excess of 6.5% per annum.

“All of this is occurring within a stable political environment, with a government focused on delivering long-term, prudent macroeconomic policy, while deeply integrating with the rest of the world through bilateral and regional trade agreements, the most of any emerging Asian country in history.

“We favour those sectors that are a fundamental part of Vietnam’s domestic growth story such as consumer discretionary and retail, financials, healthcare, and construction materials. VinaCapital Vietnam Opportunity is unique among Vietnam-focused funds in that it can invest across asset classes, and our portfolio includes a mix of listed and private equity holdings. This strategy gives us access to a wider range of exciting opportunities than many other funds.”

India – a shift in the status quo

David Cornell, Manager of India Capital Growth, said: “Compared with China, India’s scope for improvements in productivity is enormous. Infrastructure development has an important part to play in this, evidenced by the US, where the development of the interstate highway system reportedly contributed to a quarter of the nation’s productivity increase between 1950 and 1989. Whilst China’s physical networks are already well bedded in, India has some way to go, but the government’s recognition of this makes the country’s prospects particularly interesting. In December, Finance Minister Nirmala Sitharaman announced the government’s infrastructure spending plans for the next five years, totalling over US$1.4tn, a figure that includes the completion of projects that are already in progress. This scale of funding has the ability to drastically improve both physical and digital networks around the country, as well as creating numerous employment opportunities, an exciting prospect for a country that is growing fast off a low base.

“Indian society is experiencing a shift in the status quo, boosting the country’s alcoholic beverage industry. Traditionally, ‘men of a certain age’ have underpinned a market dominated by whisky and beer as consumption was considered taboo for the wider population. As society becomes more accepting, the size of the pie as well as the product range has expanded. We manage our exposure to this theme via Radico Khaitan, the third largest spirits company in India, which has compounded profits at about 20% over the last five years.”

Chinese New Year - the investment companies with highest exposure to China, Hong Kong and Taiwan

Source:AIC/Morningstar

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Notes

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