Rising inflation and economies on the brink of recession are dominating headlines across most global markets. But it is crucial to maintain a long-term perspective during volatile times. I remain focused on companies with strong long-term prospects trading at reasonable valuations. Good risk-reward opportunities often emerge during periods of volatility.
The US and European countries have begun tightening monetary policy to counter inflation, but China has maintained an easing stance, which history shows often supports markets. This monetary policy, combined with structural tailwinds such as growing self-sufficiency, increasing disposable incomes and rising domestic consumption, provides investment opportunities in the Chinese market.
Shandong Sinocera: thriving in adversity
Shandong Sinocera (Shanghai: 300285) is a leading player in fine ceramic materials in China. It is actively taking market share from global competitors in all product segments despite ongoing supply-chain disruptions and the trend towards deglobalisation owing to rising geopolitical tension and the impact of the pandemic.
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Domestic substitution is a trend we see across many markets in China. The company’s competitive advantages include a strong technology platform, a lean cost structure and better support services for customers. The group is expected to grow sales and earnings by an annual 30% in the next five years.
SKShu Paint: painting the property sector
The property sector in China has been under particular pressure since late 2021. While the stabilisation process is bumpy and slow, the related paint industry is an attractive yet often overlooked business with pricing power that is helping it deliver a high return on invested capital (ROIC), a key gauge of profitability, as well as solid cash flows.
SKShu Paint (Shanghai: 603737) is gaining market share through the consolidation of what remains a very fragmented market. Demand for repainting is picking up, meaning China’s architectural paint requirements will expand significantly, even if demand for new-build residential property remains weak.
The company fosters a culture focused on the customer and dedicates itself to making environmentally friendly products accredited by global institutions such as Greenguard. We think the earnings outlook for the second half of 2022 remains positive and that most of the market turbulence is behind us.
Lufax: a severely undervalued lender
In the hope of revitalising GDP growth, the Chinese leadership has pledged to increase its support for the economy, especially small firms hit by pandemic lockdowns. That means Lufax (NYSE: LU), a severely undervalued leader in the online lending sector, could present an opportunity as the regulatory landscape becomes clearer.
The company differentiates itself by targeting small-business owners underserved by banks. Lufax’s core strengths lie in its strong offline capability, sophisticated risk-management system and robust wealth-management platform. The management has proactively mitigated regulatory risks, and both dividends and stock buybacks show confidence in its business and cash flows.
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