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Investment insights from Capital Group

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China
China: moving from world’s factory to high-tech innovator
Rob Lovelace
Vice Chairman
Chris Thomsen
Equity Portfolio Manager
KEY TAKEAWAYS
  • China has evolved from the world’s factory to an innovative, tech-driven economy.
  • The approach to US-China relations is unlikely to change under a Biden Administration, but we expect both parties will remain at the negotiating table.
  • Next-generation, entrepreneur-driven companies coming to market add to a huge opportunity set for investors, which extends from manufacturing to health care and e-commerce.

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


*The Stock Connect program was launched in 2014. It is a unique collaboration establishing a trading link between the Hong Kong, Shanghai and Shenzhen stock markets. It allows investors in each market to trade shares on the other two markets using their local brokers and clearing house.

As at 31 December 2020. Gross domestic product (GDP) data is the combined value of the trailing four quarters. Equity market values reflect MSCI China Investable Market Index from 30/6/94 through 30/9/08 and the MSCI China All Shares Investable Market Index thereafter. EM: emerging markets. Source: Refinitiv Datastream

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.


 


Risk factors you should consider before investing:

  • 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.


Rob Lovelace is vice chairman and president of The Capital Group Companies, Inc., chief executive officer of Capital Research and Management Company, and an equity portfolio manager. Rob has 35 years of investment experience (as-of 31/12/2020), all with Capital Group. Earlier in his career, Rob covered global mining & metals companies as an equity investment analyst. He holds a bachelor’s degree in mineral economics (geology) from Princeton University. He also holds the Chartered Financial Analyst® designation.

Chris Thomsen is an equity portfolio manager with 23 years of industry experience. He holds an MBA from Columbia Business School and a bachelor’s degree in international economics from the School of Foreign Service at Georgetown University.


 

Past results are not a guarantee of future results. 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. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.