We recently asked seasoned portfolio managers Rob Lovelace and Chris Thomsen for their views on navigating the Chinese equity market. Here we have summarised how recent history has informed their investment thinking, the opportunities that exist in the market and the importance of on-the-ground knowledge when analysing companies in China.

Q. What is China’s recent economic history and how does that inform your view of the country over the next few years?

A. Rob Lovelace

It is no understatement to say that China’s recent history has really been remarkable. There have been a lot of small steps in China’s capital market evolution and as part of that it opened itself up to outside capital. However, there was a lot of discussion inside China about which model of economic governance and which version of capital markets to adopt moving forward. A defining moment came with the global financial crisis (GFC). The GFC shattered confidence in the ‘Western’ (US and European) economic model and allowed the nationalist model to really push ahead.

China’s share of global GDP has grown rapidly

Stock market is still small relative to size of economy

When Xi Jinping became party leader and president he adopted the model that we saw in China’s 2015 five-year plan. This five-year plan was a break from the previous approach where China had been more open to global integration through trade and finance. In some ways it was a declaration of independence from conformity with the global order.

More recently, China has indicated it wants to continue market integration and welcomes external capital flows, but it has adopted a fairly nationalistic economic policy with a view to having as little reliance on other countries as possible. Subsequently, China’s relations with a number of countries have deteriorated.

I think the rhetoric of the Trump administration – opposition to unbridled cooperation, sharing of intellectual property, etc. – is set to continue under President Biden. I would term the period we are in now as a ‘conscious uncoupling’: China is taking greater control in high-technology areas and the US is diversifying its supply lines.

In terms of working through the issues, China has a very clear objective. It wants to be strong, independent and limit vulnerabilities to foreign influences. US policy has not been as coordinated and the country is still debating what it wants out of the relationship. Europe is going through a similar struggle. However, relationships between these regions are intertwined. China is linked to the West through assets – it holds about a trillion dollars in US debt – and the West is linked to China through trade. These interdependencies indicate that it is in all parties’ economic interests to keep talking – because completely decoupling is not going to be possible.

Looking towards the next few years, China is well positioned economically. It has come through the pandemic successfully. It didn’t need to implement stimulus measures to the same extent as the rest of the world, so it has a strong balance sheet with capacity to provide further stimulus if needed. China’s domestic economy has rebounded strongly because of early containment measures. It is in a good position not only to attract capital inflows but expand its economy and markets. On the flip side, we do seem to be in an era of global decoupling and generally a more confrontational period in terms of international relations.

 

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• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.