Investors today should keep China in mind, according to US asset manager Capital Group. CEO Robert Lovelace (photo) and fund manager Christopher Thomsen, agree that understanding the country means looking into its past. China has has undergone a profound transformation, greatly increasing investment opportunities.
In Lovelace’s view, the 2008 financial crisis was a turning point for China because it shook confidence in the European-American economic model and the workings of capital markets.
“That’s why China has started to follow a more nationalistic model,” said Lovelace. China was relatively immune to the effects of the 2008 crisis because it was not fully integrated into the global economy, he explained.
Today, however, the country seeks to make the best of both worlds and Thomsen points to an emerging dual-track strategy. “The government wants to steer the Chinese economy into a new direction prioritising domestic consumption – the so-called ‘internal track’ – while keeping the country open to international trade and investment – the ‘external track’,” he explained. “One of the benefits of this arrangement that it vertically integrates the domestic supply chain.”
Lovelace added: “today, the country wants to be as independent as possible from other countries, especially in terms of raw materials and supplies such as semiconductors.”
He also stressed that China is in good economic shape today because it wasn’t compelled to introduce as many coronavirus-related support measures as the rest of the world. “It has a strong trade balance and has kept a multitude of measures in reserve that we have already deployed,” he explained. “Given that strength, they will continue to attract capital and grow their markets and economies.”
Frictions
But not everything’s rosy. “Today, we are clearly in a phase where there is more friction,” said Thomsen. “China is choosing its own path geopolitically and that’s bringing tensions.”
He added, however: “their willingness, as a centrally-planned economy, to intervene in companies is also causing turmoil– their structure is not a panacea.”
He saw the biggest dangers as the continuation of the trade war and higher tariffs, stricter internal regulation, high levels of indebtedness in the economy and the recent anti-monopoly law targeting internet companies and corporate fraud.
Lovelace stated that he does not expect any improvement in the US-China trading relationship. Today, according to him, we are in a period of deliberate disconnection. “The US is diversifying its supply chains and moving production to countries outside of China,” said Lovelace. “The US will continue to depend on China for trade, anyway and China is in turn tied to the US by its huge position in US government bonds.”
Top executive Lovelace also points to the 2015 Five-Year Plan as a very important document. “It can be considered a declaration of independence, accelerating its confrontation with the rest of the world,” he said.
“In the end, Trump responded because he wanted to put an end to unbridled cooperation and the sharing of intellectual property,” he added. “Under Biden, this policy continued – Biden did not even withdraw from the tariffs Trump had put into place.”
The two men emphasised that China seeks to be strong and independent so as not to have to depend on anyone. “That is what the Chinese rulers have in mind,” said Lovelace. “The US now has to decide what it wants out of its unclear relationships with China and with Europe”, he stated. “China, on the other hand, knows exactly what it wants and is therefore in the strongest position.”
Many opportunities
“China’s transformation over the past 20 years has been impressive: from the world’s factory to a dynamic economy driven by technology, innovation and the growth of the middle class,” Thomsen pointed out, saying China is too big for investors to ignore. “The only question to ask is how big your exposure to China should be and how it will be put into practice.”
China is underrepresented in many portfolios as well as on major indices: China accounts for 20% of world GDP but makes up only 6% of Morgan Stanley Capital International (MSCI) indices. “It is clear that this will significantly increase in the coming years, especially if China further opens its capital markets,” he said.
According to Lovelace, the Chinese economy is actually running normally. “Domestic travel is at pre-Covid-19 crisis levels and high copper and iron ore prices point to the economy’ strength.” He added that the Chinese economy will grow more than the expected 6% this year and will remain at a high 5-6% growth rate in coming years.
The number of investment opportunities has also enormously increased. China has developed its own pharmaceutical industry and is a global player in the area of technology.
“In these areas, we opt for Chinese companies in our funds over multinationals,” said Lovelace. “In consumer goods, however, we continue to focus on China through large international companies.”
Thomsen, for his part, sees great potential in travel companies, clean energy (as the country seeks to phase out its coal industry), insurance companies (with the average Chinese getting richer), the third generation of internet companies and the booming car industry.