Two economies dominate consideration of economic prospects in the next decade. Look around today. Almost every modern convenience was conceived of or perfected in the United States, and almost every device facilitating this convenience was made in China; and this reality of daily life, for most on the planet, is unlikely to change soon.
In this context, to be as uninvested as global investors in China presently are, seems almost reckless; but those taking the contrarian view have been mauled in recent years as a conspiracy of unfavorable circumstances have permitted few to prosper from China investment.
There’s no room here for a long postmortem. I’d note only that one-off factors responsible for this poor recent performance are unlikely to reoccur soon.
Videlicet, if global pandemics are once in 100-year events we’re good now for the next 96-years. If property markets go in cycles, China’s are self-evidently nearer a bottom than a top. If over-exuberance in new-new things was bound to correct the big fall in China’s tech darlings has, most likely, taken place. Finally, if China’s status was to shift in geopolitical-risk calculations from plucky arriviste to existential threat we’re through that reappraisal, and some.
What we’re left with are self-evident and compelling truths that make a robust case for investment. Truths, I believe, that’ll have a positive effect on the valuation of China-related assets as we progress into and through 2024.
In no particular order, they are:
Valuation. There’s no need to labor this point. Amazon.com Inc. (AMZN), 80x – Alibaba Group Holding Limited (BABA) 11x. Chevron Corporation (CVX), 11x – Petrochina (00857 HK), 5x, and so on. China’s across the board ultra-low stock valuations provide a very considerable margin of safety for investors.
Diversification. To the point at the top. There are only two economies that’ll matter significantly in the world we’re going to be in in the years to come. The excess of success the U.S. has enjoyed may, but is unlikely to, persist. Investors will need a counterweight and no other economy has the dynamism and variety of opportunities China has to offer.
Competitiveness. I remember when Japanese motorcycles arrived in the U.K. they were dismissed as J*p-Cr*p. We know what happened next. Same process occurred with Hyundai autos. China today is the most competitive producer of just about everything and this won’t change soon. This uniquely buttresses an already awesome-in-scale economy.
Scale. Talking of which. Great economic empires, the Roman, the British and now the American all have/had one thing in common; scale. No other economy can offer investors access to such developing consumer scale as China. Even business that long ago went ex-growth in developed markets still have considerable headroom in China.
Momentum. Forget ‘growth’ as an argument for China engagement, either GDP or bottom-up new-economy fairy dust. The argument hasn’t worked reliably in the past and, most likely, won’t work in future. Development momentum though will persist and is, although often a dull prospect, a bankable commodity if you know how to harness it.
A Nadir of Pessimism. A final point that also needs little elaboration. If you use a developed market toolbox to analyze Chinese companies you may find some uninvestable*; but a great many more are not. One-size-fits-all pessimism has resulted in ‘Acres of Diamonds’ on offer presently (a subject I wrote more on here recently).
[*I suspect recent shenanigans in China’s video gaming companies may be less part of an ongoing process and more a closing, if not final, chapter of events that began with the suspension of Ant Group (Nov. 2020). I’d still avoid the new economy complex, at any price, for the time being though.]
Despite the Grinch’s best efforts Christmas came anyway and China, despite the pessimism that’s the dominant leitmotiv among investors presently, is likely to also just keep coming.
Surely, there are problems. In my opinion though it’s the scallywags, shabby operators, incautious forecasters, short-term boosters and poor company managers (found always and everywhere) that’ve conspired to give the space a bad name rather than systemic problems that should rule out adding Chinese companies to portfolios.
In fact, I find many, many Chinese companies run by conscientious stewards trying their darnedest. Companies with strong organic growth whose stock prices today reflect a fraction of their future-value potential; and I believe the valuations of these enterprises will surely improve from their currently depressed levels.
The self-evident truths referenced above compel such an outcome.
Nial Gooding
Thursday, December 28th 2023