VIDEOS | NOVEMBER 2019
Matt Miller: Now, Winnie, how does China pose a risk to emerging market and also developed market investing? How do you think this uncertainty is impacting equity share prices? How much of it's priced into the market now?
Winnie Kwan: Well, what we've seen so far — which is the biggest impact in terms of China's development in global investing — has been the trade dispute's impact on corporate capex.
And so we have seen a delay in corporate capex across many sectors, in particular autos, capital goods and also, to some extent, semiconductors. And that has actually, interestingly, hurt a lot of companies in Germany and also in Japan the most, because they are very geared towards capital goods, chemicals and also autos.
Kent Chan: If I can add as well, interestingly, if you look at the free cash generation of emerging markets, that's actually recovered. And if you look at the earnings per share recovery in emerging markets, that's somewhat tracked with the United States. But it's this overhang of geopolitical uncertainty which has held share prices back despite the improvements fundamentally.
Matt Miller: Now — just staying with you, Kent, for a minute — some might say, "Well, if there's so much uncertainty, why invest” or “why invest soon?” Is there a case for waiting until the dust clears on all this? How do you think about that?
Kent Chan: I like to think about our time horizon. What happens in the short term — let's call it the next one, two or three year[s] — really creates opportunity to position portfolios.
And to an extent, this might create opportunities, not just for China but across emerging markets — also multinationals which sell into China, that have potentially been held back by the uncertainties.
So, from that standpoint, whenever people start asking, “Should I bother investing,” or “why invest in emerging markets,” or “why invest in China," that tends to be the point where it's time to start walking into those markets.
Winnie Kwan: And if I can just add to that?
Matt Miller: Yes.
Winnie Kwan: Because of this uncertainty, there's been some structural shift in terms of [the] global manufacturing food chain. Ten years ago, China already had started to move final assembly out of China. And the reason is because of wage pressures.
Matt Miller: Because wages were rising in China.
Winnie Kwan: Wages were rising. And I think now there is an added benefit to hedge risk and also to manage tariffs, which are changing. So what you're seeing is that the Chinese manufacturers are actually moving up the value chains very quickly to go into component modules manufacturing — rather than final assembly — to avoid the tariffs. And also in design work. And so the value-add of the manufacturing is actually going up. And in this process, what we've seen is that we have a lot of new industries that are coming up in China.
And to Kent's point, because we invest in the long term, it's actually a really good opportunity to find new winners. I mentioned earlier in terms of the new biotech sector that's happening in China — with talent flows going from the U.S. back to China — that's creating, again, a new industry in domestic China.
Matt Miller: Just to stick with that for a second — Winnie, it's interesting, because that's an example of almost unintended consequences of the trade war. There's a school of thought that says that the U.S., by pushing what Trump and trade representative [Robert] Lighthizer — the agenda they're pushing — will actually, if it's implemented, make China's economy stronger over the long term because it's introducing more market forces or more competition that could boost productivity, etc.
Winnie Kwan: Yeah, I do agree. And I think that the structure of the Chinese economy is, as a result, changing faster, not slower. And the external pressure has caused the Chinese economy to have to evolve into a less export-oriented, more domestic consumption-oriented and more service-oriented and higher value-add manufacturing focus-type economy.
Matt Miller: And all of that creates potential investment opportunities that —
Winnie Kwan: Yes.
Matt Miller: — we’d fund.
Winnie Kwan: New areas of growth, new leaders, new sectors.
Matt Miller: Very interesting.
Kent Chan is an equity investment specialist at Capital Group. He has 27 years of investment experience, three with Capital. He holds a bachelor’s in political economics from the University of California, Berkeley.
Winnie Kwan is an equity portfolio manager at Capital Group. She has 22 years of investment experience, 19 with Capital. She holds a master’s and bachelor’s degree in economics from Cambridge.