“The best consumer story in the world”: Investors ride China’s economic recovery

China flags

Investors are eyeing China’s growing equity markets as signs of an economic recovery start to emerge. The IMF is forecasting that China will grow in 2020 and see a strong rebound in 2021, while projections for other large economies show them lagging behind.

“China is the second-largest economy in the world and its equity market is significantly under-represented in investors’ portfolios,” says Fabiana Fedeli, global head of fundamental equities at Dutch asset management firm Robeco, in a recent market outlook. “Even after their recent rally, A-shares trade not far from historical lows, in terms of valuation relative to US equities.” 

By mid-July, China’s large cap index, CSI 300, was up nearly 17 per cent ahead of the start of the year, having since retreated slightly off its highs. Meanwhile, the S&P500 is struggling to regain the ground lost because of pandemic disruptions, spending only one day at a higher level than at the start of 2020. 

Stephen Dover, head of equities at California-based asset manager Franklin Templeton, is “bullish on China”, and predicts it will take a turn towards a “much more consumer-driven, high-technology economy”.

“China will likely still grow its gross domestic product at a sustained, slower rate more focused on consumers’ increasing incomes,” says Dover.

China may begin moving towards a model of economic growth more similar to the US, which he notes is “about 70 per cent dependent on the consumer”. 

Automation, robotics, lower energy costs, and higher productivity make a convincing case for supply chains and manufacturing jobs to return to the US from China, where the cost of employment continues to rise.

Andy Rothman, investment strategist at Matthews Asia, also notes that China's economy is “increasingly driven by domestic demand”, and is encouraged by consumer spending, which is already rebounding. 

“Last year was the eighth consecutive year in which the consumer and services (or tertiary) part of China's GDP was the largest part. Although consumer spending is likely to remain softer than usual until next year, on a relative basis China is likely to remain the world's best consumer story,” says Rothman.

Retail sales (adjusted for inflation) fell during the peak of China’s Covid-19 outbreak in January and February by 23.7 per cent, compared to the previous year. In June, retail sales were only 2.9 per cent lower than in 2019, which Rothman calls a “healthy recovery, but not yet back to normal”.

He says that there remains a “low risk” that the recovery is stymied by a global recession, or by the downward spiral in US-China relations.

Tensions between the two countries have worsened recently, with the US demanding the closure of China’s consulate in Houston based on accusations of “intellectual property theft”, to which China responded by ordering the US to close its consulate in Chengdu. 

Dale Nicholls, portfolio manager of Fidelity China Special Situations, says that the US-Sino trade dispute is likely to continue as November’s US election approaches. 

“Volatility is not always a bad thing,” Nicholls adds. “Price decreases seen since the outbreak of the virus have created many opportunities to purchase well-managed companies that I’ve previously considered attractive but too expensive. One example has been the initiation of a position in aircraft lessor BOC Aviation, as I expect it will weather the downturn better than peers. In previous downturns, while some airlines have struggled and failed, airline lessors have benefited by re-leasing aircraft to stronger survivors.”

The portfolio currently derives 98 per cent of its revenues from Greater China (China, Hong Kong, and Taiwan), mostly focused on domestic consumer, technology, and pharmaceuticals firms.

Nicholls also says the portfolio’s value will be supported by the “increasingly significant role China will assume in global equity and bond markets over the next decade”. 

“China’s share of the MSCI AC World Index has risen from 1.9 per cent to 4.9 per cent over the past 10 years and I expect its share to continue to rise. As this trend plays out, China will be increasingly difficult for global investors to ignore.” 

China is often seen by investors as lacking transparency and accessibility, but the country has made efforts in recent years to open its markets to foreigners, such as allowing international investors market access via the launch of the Hong Kong–Shanghai Stock Connect programme in late 2014.

“The sheer breadth and depth of China’s onshore markets and the lack of institutional investors means that stocks are relatively under-researched and provide rich stock-picking opportunities for active investors,” says Nicholls.