Investors in Asia have endured a difficult few years. The combination of China’s COVID zero policy together with it’s crackdown on property developers, regulation of the tech sector and increased geopolitical tension with the West have made investment returns hard to come by.
Cameron Robertson, portfolio manager at Platinum Asset Management believes that the poor sentiment towards China has dampened investor interest across the whole of Asia. As the Chinese economy picks up, there is a chance this could reignite interest across the region more broadly.
2022 witnessed the slowest pace of growth in the Chinese economy since 1976. Chinese retail sales (ex-autos) in November 2022 fell almost 6% during lockdowns. For perspective, at the worst point of the GFC, US retail sales fell around 10%.
Nicholas Markiewicz, portfolio manager at Lanyon Asset Management says that most pundits saw the 20th party congress in late October 2022 as the government’s ‘turning point’, but he has noticed subtle policy shifts from the Chinese government in the months before that. He believes the crackdown on the technology sector appears to be more or less over, property developers are in the process of being recapitalised and the government is beginning to thaw relations with the West.
Many investors associate a stronger Chinese economy with demand for Australian iron ore. However with China recently consolidating purchases of raw materials under a single state owned buyer called China Mineral Resources Group in an effort to control prices, the iron ore trade may not be the one way bet it has been in the past. Investors should consider other ways of participating in an Asian rebound.
Robertson and Markiewicz are investing in the Chinese consumer theme. Robertson says that during COVID household bank deposits increased by 42% and he thinks that we could see the same sort of ‘revenge spending’ that we saw in other economies following the end of lockdowns. While the sharp rally at the end of 2022 and in early 2023 has captured some of the benefits of the changed environment, Cameron remains optimistic about Chinese parcel delivery company ZTO Express, which is a natural beneficiary of consumer spending.
Markiewicz suggests that the doubling of the savings rate during COVID means that Chinese households have an additional US $800bn in their bank accounts. He says that the most obvious plays are the large domestic consumer platforms and Lanyon’s preferred pick is Alibaba which still trades at a heavily depressed valuation.
Outside of direct consumer plays, travel is clearly another segment likely to benefit from China’s reopening. Airbus and Boeing continue to dominate the commercial aviation market according to Markiewicz, with Airbus having an 8 year backlog, no debt, and still writing new orders for Chinese airlines.
He adds that for those with apprehensions about investing directly in Chinese companies, there are still many Western consumer businesses that derive significant revenue from China and likely to experience a strong recovery. BMW for example derives nearly 40% of its sales from China, has one of the world’s best balance sheets and trades on a single digit earnings multiple.
Robertson says that pre-COVID, around a third of Thailand’s tourists came from China. As the flow of tourists from China gathers momentum, money is expected to return to the Thai economy and that will have wide ranging effects across that market.
ASX listed investment, Auckland Airport is another likely beneficiary of reinvigorated Chinese tourism. According to a recent ASX announcement, New Zealand is one of 20 countries open to Chinese travel agencies.
The changing of conditions in China are likely to have other second-order effects, such as increasing demand for energy. This could bring another squeeze on energy markets at some point which could benefit Australia’s world class energy companies including Woodside and Santos.
While it is often considered that higher energy prices resulting from China’s reopening may contribute to inflation, Robertson suspects that the impact is likely to be at the margin. He believes that the inflationary environment we’re seeing across the Western economies is driven by a broad range of complex factors, such as shifting supply chains, monetary policies unleashed by our central banks over recent years and automation.
The landscape has changed materially in China over the past year, which could well deliver good medium returns in the Asian region for alert investors.
This article was written by Mark Draper and featured in the Australian Financial Review in March 2023