Still roaring? Investment company managers on the outlook for China

Managers discuss the growth slowdown, regulation, monetary easing and ESG.

Chinese celebration

1 February 2022 marks Chinese New Year, the Year of the Tiger. Tigers are said to be brave, competitive, unpredictable, confident and display great levels of willpower. But will the Chinese stock market live up to this by improving on its lacklustre performance last year?

The Association of Investment Companies (AIC) has spoken to investment company managers investing in China to seek their thoughts on the outlook for 2022.

Ian Hargreaves, Portfolio Manager of Invesco Asia Trust, said: “Exuberance towards China at the beginning of 2021 has given way to disappointment and pessimism, providing investors with a much more favourable risk premium going into 2022. 
“It is commonly perceived that China’s property sector is vulnerable; regulatory tightening of ‘new economy’ sectors has broken their business models; and that the domestic economy will continue to slow. We only agree with the latter and have long argued that China’s economic growth should decline from unsustainably high levels due to the undesirable debt required to sustain this. Thankfully policymakers are in agreement and remain committed to improving the quality rather than the quantity of growth and reducing financial risk.”

Nicholas Yeo, Co-Manager of abrdn China Investment Company, said: “While full-year GDP growth of 8.1% was slightly better than expected, China’s economy is not back on a steady footing yet. The good news is that authorities retain plenty of headroom to provide policy support. Recently they cut interest rates and accelerated approvals for infrastructure projects, which will go some way to bolstering investor confidence. Nonetheless, a few headwinds for the economy remain. Liquidity issues continue to plague some highly levered property developers, while a resurgence in COVID-19 cases and China’s zero-tolerance approach to COVID are disrupting economic activities and weighing on consumption. Amid these uncertainties, we favour high-quality companies with good management track records, competitive advantages and strong balance sheets. They will be best positioned to navigate any volatility.”

Rebecca Jiang, Co-Portfolio Manager of the JPMorgan China Growth and Income Investment Trust, said: “We believe the country’s robust long-term economic outlook, combined with the many opportunities created by structural change, especially in technology and healthcare, will continue to drive positive and sustained returns in Chinese equities.  Despite near-term market turbulence, we remain optimistic about the long-term growth prospects for Chinese equities.”

Chetan Sehgal, Lead Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT), said: “2021 was a challenging year for emerging markets. Mixed vaccination progress across countries contributed to false starts in exiting the pandemic. China was a key concern, with tighter fiscal and monetary policies, regulatory changes across industries and a zero COVID-19 approach combining to weigh on investor sentiment.

“We are monitoring China’s economic slowdown. We believe that the diversified approach we have to investment in China is probably the best one as there is still a lot of policy uncertainty.”

Monetary policy and regulation

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “The divergence between the US and European monetary policy compared to China is particularly wide at present. China is certainly at a different stage in the cycle with an easing bias, that history shows often supports markets. Having approached the initial COVID-19 pandemic differently to the loose monetary policy of western governments, China’s central bank has more levers to pull to encourage growth after the slowdown of 2021. The recent cut to the borrowing rate of its medium-term loans for the first time since April 2020 is just one example.

“Broadly speaking, while I do not expect the government’s drive towards a healthier, less speculative property sector to be reversed anytime soon, one should not be surprised to see some continued policy fine tuning, such as the supportive measures that have recently been announced. We are already seeing signs of accelerating mortgage approvals in some cities and there is significant scope to loosen policy further.”

Roderick Snell and Sophie Earnshaw, Co-Managers of Baillie Gifford China Growth, said: “What we have seen this year is China highlighting a focus on long-term sustainable goals at the expense of short-term growth. To us, this may not be a bad thing, given a shift in focus from growth at all costs to quality sustainable growth. But for a market often highlighted for high turnover and its short-term focus, changes to quarterly earnings and negative news flow are likely to be met with selling pressure. Against this background, it is important not to lose sight of the long-term structural and disruptive changes that are likely to play a far larger role in portfolios. For growth investors focused on that long-term horizon, China’s continued urbanisation, consumption upgrade and reform, and rapid development in innovation and technology continue to provide much scope for optimism for stock picking. Yet, this needs to be carefully balanced with consideration for the role of the state, the direction and speed of regulatory change, and overarching geopolitical concerns.”

Is now the time to buy?

Rebecca Jiang, Co-Portfolio Manager of the JPMorgan China Growth and Income Investment Trust, said: “The investment case for buying in China right now is a strong one, although it is more important than ever for investors to take a long-term view. Recently, we have been buying select consumer staples stocks given attractive valuation opportunities.

“Overall, we are confident that consumption will continue to grow, particularly across the market cap range over the medium and long-term in China. This is as consumers become wealthier and more discerning and we believe that well managed companies with strong brands and channel controls can effectively pass on the impact of input cost inflation.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “As is often the case with broad-based corrections, some stocks with lesser regulatory risk have also been sold off, presenting opportunities. Many smaller companies are down despite the fact they will actually benefit from regulatory action in areas like anti-trust. Further, the valuation gap versus global peers is now excessive, despite similar regulatory challenges in several markets. With valuations where they are, we believe the risk-reward balance is now clearly in the investor’s favour.”

ESG considerations

Pruksa Iamthongthong, Co-Manager of Asia Dragon Trust, said: “As part of a large, global investment firm with deep roots in Asia, we see it as our role to act as a trusted guide for our clients, avoiding companies that cross clear boundaries – for example, those with supply chains associated with rights abuses or that breach critical ESG measures. Through an active approach we navigate challenges associated with a market as complex as China by providing transparency in our investments and insights through our proprietary research. We have a duty to exercise due care; a fiduciary duty of trust; contractual duties under the Investment Management Agreement; and duties to abide by regulatory frameworks. For global investors, exposure to Chinese securities offers valuable diversification benefits. But it also comes with risks, including regulation, market volatility and ESG issues. We fully integrate ESG analysis into our investment decision-making and factor in risks carefully when we build client portfolios.”

Ian Hargreaves, Portfolio Manager of Invesco Asia Trust, said: “ESG is integral to our fundamental analysis. Political issues in China and elsewhere are indeed disconcerting and a significant factor in driving market uncertainty and often a valuation discount. Our approach to ESG matters is to assess the potential implications at the individual company level and establish whether the market is being overly pessimistic about the risks and opportunities. As active investors, it is important to avoid generalisations because outsized returns are often available when perceived risk is greatest. Our job is to assess reality at the individual company level and invest when the share price is well below the company’s true worth after integrating ESG considerations. In the case of Xinjiang, companies supplying their materials from the region may be subject to sanctions or may be boycotted by customers. These risks must not be ignored and may make an investment unattractive. However, these risks are not unique to Chinese companies given global supply chains. The investible universe is vast, and broad-brush indiscriminate bearishness caused by political issues usually provides opportunities for investors.”

Roderick Snell and Sophie Earnshaw, Co-Managers of Baillie Gifford China Growth, said: “For all the positives that come from the size of China’s markets, the speed of its growth, and for us at Baillie Gifford, the increasing number of world-leading innovative companies, China can still polarise investment opinion, and often comes with comments about poor governance, a lack of innovation or reform, and a scepticism about its politics. The path ahead is likely to involve significant volatility driven not only by fundamental economic factors, but by domestic policy and regulation (and the risks of missteps) and external geopolitical issues.

“We seek to mitigate the risks of investing in China as best we can with high quality research and active stock picking, bringing together global perspectives with local insight from our onshore Shanghai office, and taking a company-by-company approach to analysis. In doing so, we seek to prevent broad generalisations stopping us from finding the exciting companies which are set to benefit from the large and growing opportunities that we see in coming decades.”

Where do you see the best opportunities?

Pruksa Iamthongthong, Co-Manager of Asia Dragon Trust, said: “As a bottom-up stock picker we look for nimble companies able to adapt to regulatory change and those that align with China’s policy goals in areas such as digital innovation, green technology, affordable healthcare and improved livelihoods.

“We have identified five key themes. Firstly, aspiration. We buy into China’s premiumisation story. We believe its growing middle-class wealth and urbanisation will drive demand for premium goods and services in the long run, with the baijiu segment a key beneficiary. Secondly, digital, especially in cyber security and cloud services. This fits in with Beijing’s objectives of increasing localisation, improving productivity, lowering costs, fostering innovation and propelling growth. Thirdly, green: this includes renewable energy and storage, which aligns with government policy on decarbonisation and net-zero emissions by 2060. Fourthly, health: cheaper and more accessible healthcare is becoming increasingly important as China’s population ages rapidly. We favour healthcare services, including firms providing innovative research and clinical trial services that bring high-quality therapies to market cheaply and quickly. Lastly, wealth, as China seeks to become a moderately prosperous society by 2035. We think the financial services sector will play a key role in creating and protecting wealth. We also see a large addressable market in life and health insurance, especially given China’s ageing population.”

Chetan Sehgal, Lead Portfolio Manager of Templeton Emerging Markets Investment Trust (TEMIT), said: “The overall internet landscape across emerging markets remains dynamic and diverse. China has served as a massive laboratory, pioneering business models in e-commerce, online payment and other services that other markets have subsequently adopted and adapted to succeed in their own right. As the number of internet companies multiply, so will competition. We are mindful of this and favour companies that can sustain their competitive advantages. We are also on the lookout for the next big innovations. China, with its deep technology capabilities, is one market that appears well-positioned to drive the next wave of breakthroughs.”



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Notes to editors

  1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £277 billion.
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