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Trade conflict aimed at China’s industrial project, says Robeco

US trade actions against China are actually targeting China's 2025 project, a government initiative intended to move the mainland up the tech value chain, according to Victoria Mio, the firm’s chief investment officer for China.
Victoria Mio, Robeco

Mio said the trade tension between the US and China has the potential to hurt China’s international airlines and companies that make technology hardware, auto components and semiconductors. These types of companies are most exposed because a high proportion of their total revenue is derived from the US market.

However, she believes the trade measures are not only about balancing the trade surplus (In 2017, China bought $130bn in US goods while the US bought $500bn from China).

“The tariffs imposed limit the scale of China’s direct investments in different types of US tech companies with the aim of protecting intellectual property,” she said at a media briefing in Hong Kong yesterday.

Therefore, Mio believes the main purpose of the tariffs and the ongoing trade negotiations is to slow development of the Made in China 2025 project. The project, similar to Germany’s Industrial 4.0 project, is part of state industrial policy aimed at moving the manufacturing sector up the value chain, particularly in high technology devices and semiconductors.

Mio, who manages the Robeco Chinese Equity Fund, is underweight in information technology. The sector takes up 29% of assets, compared to the index’s 29.6%. The IT holdings in the fund are mainly China’s internet-related companies. Alibaba and Tencent are the top two holdings at 10% each.

Tariffs hit sentiment

The growing concern over trade tension has further weakened market sentiment in Hong Kong and China. Today, Shanghai’s benchmark stock index has officially entered bear territory after tumbling 20% from its January peak.

Despite negative sentiment, investors should still find attractive opportunities in the equity market because of a supportive outlook for corporates, Mio said.

“Companies in China are forecast to deliver around 20% growth in earnings per share and 16% growth in return-on-equity, year-on-year. Current valuations remain in line with the historical average of 12x.”

She cited healthcare and biotechnology companies as an example. She believes the profitability of these companies will be driven by research and development among the large Chinese pharmaceutical companies addressing domestic demand.

The R&D expense in pharmaceutical companies globally accounts for around 20% of sales on average. However, some large Chinese players, such as Jiangsu Hengrui Medicine, Sino Biopharmaceutical, Fosun Pharma and CSPC, spend approximately 9% of sales in the area.

“Chinese medicine makers will catch up with their global peers in research expense and we believe they have a certain level of retained earnings from operations from the previous years to support their R&D investment. The investment would eventually translate into an upside in their stock price,” she said.

She also expects more biotechnology companies will get listed on the Hong Kong bourse, following the planned revamp of listing rules suggested by the exchange. The relaxation of listing requirements is expected to allow biotech companies to list even though they do not have the standard requirement of three years of profitability.

Currently, the fund has an overweight in healthcare (8.7%) vs the MSCI China Index (3.6%). The only pharma-related holding in the top ten is Shenyang-based medicine maker 3sbio.



Three-year performance of the Robeco Chinese Equities Fund vs category average and its benchmark, the MSCI China Index

Source: FE. Fund NAV is converted to US dollar for comparison purposes.


Part of the Mark Allen Group.