The power of China’s vast consumer market allied to pro-growth domestic policies should serve up some juicy opportunities for investors to get their teeth into in Year of the Tiger.
The symbol for the Lunar New Year starting on February 1 is a tiger in the Chinese zodiac.1 Tigers are esteemed in Chinese culture for their strength. They’re also associated with good health – potentially auspicious in the face of a global pandemic.
But it’s the creature’s fabled self-sufficiency – an instinct to forge their own path – that investors can look to as their greatest source of optimism about China in the year ahead.
In contrast to developed markets such as the US and UK, where authorities are tightening policy to tame inflation, China has moved to ease financial conditions and access to funding. Chinese policymakers are well placed to support their economy through fiscal and monetary measures without the prospect of inflation eroding the purchasing power of local consumers.
In contrast to developed markets, where authorities are tightening policy to tame inflation, China is easing financial conditions and access to funding.
Although the Covid-19 pandemic has crimped Chinese consumption for the past two years, the market’s size means even sluggish retail sales growth generates a big increase in absolute terms. We predict China’s consumer market will surpass the US in dollar terms by 2040.2
Powerbrokers in Beijing continue to prioritise economic self-sufficiency. While common prosperity remains an important theme, authorities reaffirmed recently that redistributing income was a secondary consideration to long-term economic advancement.
Our economists believe China will retain its dynamic zero-tolerance approach to Covid through the Year of the Tiger at least to shield itself from the apparent higher transmissibility of the Omicron variant. This would likely impact global supply chains negatively.
If large Covid outbreaks continue, investors can anticipate greater divergences in growth, inflation and policy across nations in line with domestic supply-demand dynamics, the local Covid backdrop, relative policy settings and trends in global goods and services sectors.
We thought investor reactions to regulatory updates in China last year were indiscriminate. The new economy remains key to China’s vision of a modern, consumption-led economy, meaning investors should not anticipate a heavy-handed crackdown. The private sector is critical to ensure China hits its goal of becoming a moderately prosperous nation by 2035.
Looking ahead, we suspect China’s approach to Covid will create pockets that allow life to go on as normal, but also cause bouts of volatility. Still, we expect any pain to be short term. It won’t change the government’s commitment to bringing consumption back to China. Investors can benefit by maintaining exposure to this structural trend, in our view.
They will need to show the eye of the tiger in the year ahead: be watchful of developments and ready to seize on opportunities to capture growth. We see the brightest prospects for firms able to adapt to changing regulatory frameworks and align with policy objectives in areas such as digital innovation, green technology, access to affordable healthcare and improved livelihoods. We outline five themes investors can pounce on in Year of the Tiger:
Aspiration: We expect consumer names to fare well as China strives for a self-sufficient economic model. We buy into the premiumisation story – that urbanisation and rising middle-class wealth will drive demand for premium goods and services in the long run. We have positioned our portfolio to capitalise on middle-class wealth. While the government has moved to rein in basic living costs, we don’t expect it to clamp down on discretionary higher-end spending. We remain sanguine about regulatory risk in the baijiu (premium liquor) segment on the grounds that competition in the sector is healthy with a wide range of price points (i.e. no monopoly) and baijiu producers are among the biggest tax payers in China’s poorest provinces.
Digital: This theme aligns with the government’s objectives of localisation, improving productivity, lowering costs, increasing innovation and helping to propel economic growth. Our holdings in this segment are primarily software-related names. Chinese companies have advantages in software given their knowledge of the domestic market and preference for localisation in areas such as cyber security and cloud services. Cyber security and data security are important elements when it comes to national security, too, which should help to entrench localisation and self-sufficiency further.
Green: This theme aligns with government policy on decarbonisation and net-zero emissions by 2060. China dominates global manufacturing capacity for renewable energy and storage, accounting for 90% of solar and 75% of battery capacity. Decarbonising economies requires huge investment in renewable energy and storage, leaving China in line to benefit. Other industries will also need to do their part to decarbonise, so we expect greater investment in upgrading machinery and increasing energy efficiency. Our holdings include solar wafer producers, component makers, battery and related component makers, automation-related firms and a company focused on upgrading electricity grids for a renewable future.
Health: We overweight healthcare services, including firms providing innovative research and clinical trial services that bring high-quality therapies to market cheaply and quickly. Our holdings align with policy objectives to make healthcare cheaper and more accessible, important given that China has a rapidly ageing society. We also have a position in an ophthalmology hospital chain providing eye care on a discretionary basis to private patients. We underweight pharmaceutical firms on the understanding they face higher regulatory risk due to pressure on drug prices. The localisation of healthcare manufacturing equipment and supply is also an area where we see opportunities.
Wealth: This theme aligns with China’s policy objectives of becoming a moderately prosperous society by 2035. The financial services sector plays a key role in creating and protecting wealth. Our holdings in this sector contribute to the creation of strong financial and capital markets, including China’s highest quality consumer banking franchise and software names that support the development of capital markets such as trading and portfolio management. The take-up of insurance services remains low in China relative to the rest of the world. We see a large addressable market in terms of life and health insurance, especially given China’s ageing population. We expect the recent crackdown on online insurance to benefit higher-quality companies and to lift overall standards in the insurance industry.