Nicholas Yeo, Aberdeen Standard Investments
By keeping faith in China’s fundamentals and focusing on industry leaders with a strong market share and defendable competitive advantages, investors can capture emerging domestic opportunities.
These exist across a variety of names and sectors, from condiments producers and auto-parts makers to new energy firms and battery suppliers.
“In general, quality companies are quickest to recover from external shocks and better placed to deliver sustainable earnings growth,” said Nicholas Yeo, head of China equities at Aberdeen Standard Investments (ASI) during a media webinar this week.
In particular, these types of firms can absorb higher input costs – which Yeo believes will be key in an environment of rising commodity prices.
“Looking ahead, the structural drivers of Chinese consumption remain intact,” he explained. “The nation’s generation of aspirational millennials will continue to buy high-quality goods and services.”
Solid fundamentals
The fact that China set a new tourism record during its Labour Day holiday in May, after authorities sped up Covid-19 vaccinations, bodes well for consumer spending.
Even though policymakers have tightened credit conditions, the People’s Bank of China’s commitment to keeping interest rates accommodative should ease concerns that inflation will lead to policy tightening after increased industrial activity drove commodity prices, according to Yeo.
Further, China’s post-pandemic rebound should spur wage increases, in turn spurring growth in domestic consumption.
Risk aware
Inevitably, however, there are risks to bear in mind. With geopolitical tensions part of the backdrop to investing in China, investors should pay particular attention to how policymakers implement a key pillar of the latest Five-year plan: fostering more sustainable economic growth.
“That includes regulating industries that had grown rapidly without adequate oversight,” said Yeo. “Most prominently, authorities have moved to curb monopolistic practices by platform businesses in areas such as financial technology.”
Yet subsequent volatility in stock prices also creates opportunities to buy quality companies at lower valuations, he added. “This year could be a productive one for active stock-picking.”
At the same time, ASI’s Research Institute has forecast that China’s economy will expand around 9.5% in 2021. It is also notable, Yeo said, that compared with the S&P500, A-shares are almost 50% cheaper on a price-to-book basis and almost 30% cheaper on a price-to-earnings metric.
Portfolio picks
At a sector level, rising disposable incomes and increasingly health-conscious citizens boost the prospects for healthcare services. This is bolstered by moves from China’s authorities to increase tax breaks for research and development spending, aimed at driving innovation and reducing dependence on Western technology.
“This could be a key factor among China’s growing array of pharmaceutical firms,” added Yeo. His team, for example, has taken stakes in clinical research organisations that service pharma firms.
Growth is also expected in renewable energy given the sweeping support from government policies to create a low-carbon future.
This creates a bright outlook for electric vehicles, too, with adoption low in second and third-tier cities. “The government may introduce incentives to boost rural sales and invest in charging infrastructure, which would support long-term industry growth,” added Yeo.
A close eye on ESG
Quality companies also tend to be run by management teams that are more prudent and receptive to engagement on environmental, social and governance (ESG) issues.
Selecting firms with strong ESG standards improves investors’ chances of avoiding loss-making corporate failures and scandals, Yeo explained.
“It’s also a way to generate potential alpha by investing in positive change at companies. Ultimately, progressive ESG policies can help to drive a company’s returns and share price over the long run.”
