I've been investing in emerging-market portfolios since 2006 and having managed Chinese equities through both the financial crisis in 2008, and the China market bubble and crash of 2015, the volatility prompted by current China/US trade wrangling is nothing new. Most Western investors are concentrating on the trade headlines, but while this depressed valuations and impacted sentiment last year, when you step back and take a longer-term perspective on China, and see where they are really going, the impacts become much more limited and the outlook much brighter than the headlines suggest.
China goes towards a service led economy
When you stand in Beijing and look at the world from a Chinese entrepreneur's perspective, you see a domestic market full of opportunity and a positive future with Indian, Indonesian, Malaysian and other Asian markets open for business. Six of China's top ten export partners are already in Asia and while the US remains important for now, it may not be the future.
China has moved on from just being the world's factory, with over 70% of growth already driven by domestic consumption. With the majority of growth already coming outside the typical industrial and agricultural sectors, China is making its own way towards a service led economy. The growth story of the consumer and of services is certainly interesting but is not the only one. We see trade tensions spurring more rapid advances in innovative sectors and industries, areas to drive China's growth for the next decade.
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Driven by big data, China is leading the world in areas of artificial intelligence and automation. It is already well ahead of competing nations in 5G, and pushing boundaries in fintech and cyber security to new levels. These are areas outside of the typical consumption space and ones that will generate substantial growth, and corporate profits, regardless of the current trade outcomes.
Made in China should become the standard-bearer of quality
We launched the TAMAC Qilin-China Champions Fund in 2015 to capture China's growth by buying the companies who become the future dominant forces in their respective industries. This portfolio of high growth companies is allocated across some of the most interesting investment themes of the next decade. The Shanghai-Hong Kong Stock Connect allows easy access to a mainland market that, with limited analyst coverage (15% of the CSI 800 is not covered by a single sell side analyst), offers hidden investment gems. Finding and understanding these companies has given us the opportunity to maintain the fund's strong performance since launch.
We use a fundamental bottom up approach focused on growth, but we want this growth to be sustainable. Travelling and meeting with companies in China is a big part of our process; but to help with our analysis we set up and co-own a research firm in China. Once we have identified an interesting investment area, we are utilising our China based research and our access to the mainland to help identify the companies best positioned to become the champion in that specific area.
As well as growth, we want quality. The portfolio is typically made up of low debt businesses who are proving their ability to innovate or take market share in industries which have higher than average rates of return. Five years ago, China's champions in semiconductors and chip technology lagged far behind global leaders, but today we own the leading electrical component makers who are now pushing to compete on the global platform. With the position of many of our portfolio companies it is a case of when and not if Made in China becomes the standard-bearer of quality.
Rowan Francis manages the TAMAC Qilin-China Champions fund at TAMAC. For more information contact info@tamac.com
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