Pruksa Iamthongthong and Adrian Lim, Investment Managers, Asia Dragon Trust plc
- China’s recovery has been lacklustre, to the disappointment of investors
- Nevertheless, China’s economy is still building, albeit at a slower pace
- The region has a range of idiosyncratic growth opportunities
The end of China’s zero Covid policy brought renewed confidence to Asian markets, as the country’s recovery promised to restore economic momentum to the region as a whole. However, China’s revival has proved lacklustre, and investors have retreated from Asian markets. What could bring a more permanent revival in confidence back to the region?
China may not have roared out of lockdown in the same way as many Western economies, but our view is that its lacklustre recovery should not be judged too harshly. Given the length and severity of the lockdowns, it was always likely to take time for Chinese businesses and consumers to adjust to a new reality. The consumer is still waiting in the wings to support the country’s economy. Excess savings ticked up significantly during the pandemic and, unlike in the US, remain largely unspent.
Traffic is building, as Chinese citizens start to move around the country once more. It has already recovered to above its pre-Covid level, but spending will take a few more months to normalise. With tourism and leisure activities reviving, it is too soon to write off the Chinese recovery just yet.
Equally, other problems are starting to resolve across China. Youth unemployment has been ticking high, an unintended consequence of crack-down on technology, communications and smaller businesses seen in 2020. However, this is now stabilising, with companies such as Alibaba and Tencent reporting stronger earnings and announcing plans to hire more staff1. The worst appears to be over.
It is an imperfect recovery. For example, the property and infrastructure sectors are unlikely to drive growth as they have done historically. Infrastructure spending is likely to be stable, with a greater focus on ‘new’ infrastructure such as data centres and renewable energy, rather than roads and railways. The government continues to act in stabilising the property sector, as it tries to bring down leverage and encourage households to redeploy capital into more productive parts of the economy.
Nevertheless, amid the country’s revival, we find plenty of interesting companies that may benefit from reopening in the short-term, but also from structural growth trends in the longer-term. AutoHome, for example, should benefit from renewed demand for cars. We hold a number of tourism companies that are beneficiaries of growing demand for domestic and international tourism. Insurance group AIA group is seeing growing demand for its life insurance products as face-to-face interaction resumes again.
In general, it pays to invest alongside the Chinese Communist Party rather than against it. In the Asia Dragon Trust portfolio, this is most evident in our ‘going green’ theme. The Chinese government has accelerated its investment in the energy transition, which is boosting growth for companies across the ‘green’ ecosystem. We see similar government-led trends in areas such as healthcare and digitalisation.
However, even without the influence of China, there are idiosyncratic growth stories across Asia that are often overlooked by investors. We would highlight Vietnam. It had a choppy year in 2022 but remains among the strongest beneficiaries of the move by international companies to diversify their supply chains. It has compelling demographics, a stable government and its growth rate continues to soar.
TSMC is a top holding in the Trust. The company appears to be in a strong position to capitalise on the excitement over generative Artificial Intelligence (AI). It has a near-monopoly on certain parts of the semiconductor market. It remains undervalued, given its importance in global supply chains.
As consumption and business growth starts to revive, it will benefit not just China, but all intra-Asian trade. Areas such as Thailand will be beneficiaries of rising tourism, for example, with Chinese tourists accounting for around a quarter of its overall tourist arrivals pre-Covid. We see a stronger period of growth ahead.
Asian economic growth
There are compelling reasons to believe Asian economies will be in a better position than many of their Western peers from here. Western economies have taken on significant debt, but Asian governments have been far more restrained. It is a similar picture for corporates: Asian corporate balance sheets are in much better shape than their US peers.
A less welcome side effect of this restraint is that capital spending has been low. For much of the last decade, global capex has been below trend, which has contributed to some underperformance. We are starting to see that picking up, particularly as the ‘China plus One’ strategy – where international companies seek to diversify their supply chains beyond China – gets into full swing.
This is all encouraging, but there is one factor that remains elusive: confidence. Valuations remain low, particularly relative to the US, but also to their own history. When people think of Asia, they think of China and that has dented sentiment. For international investors, there remain questions over whether China is truly investable.
As we see it, many people are aware of the opportunity in Asia, but no-one wants to be the first mover. We do not have a crystal ball on the factors that will shift sentiment. However, we believe the region has a lot going for it at a time when growth is elusive elsewhere. Patience should be rewarded.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
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