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Magazine Issues » July-August 2022

China Roundtable: Has China become uninvestable?


“Hardly any growth in tech”
A secular shift in the market presents a fundamental problem and may force investors to rethink fundamental analysis of many Chinese tech stocks.

Duhra said that even without recent regulatory problems, as far as growth in the sector goes, “there’s hardly anything there”.

“I would respond to those who were saying [tech stock prices have] fallen and this is a huge opportunity now, ‘Well, look at the growth, these things are not growing, they’re losing market share.’ I don’t at this point see a great opportunity there.”

He added: “I just think there are better opportunities in Asia for companies that are cheaper and, in more structural growth areas, reporting better growth. There’s just so much more opportunity when you’re an Asia-Pac investor. I’ve got about 13 markets to choose from, I don’t have to be in those names.”

Tea said she and her colleagues were focused on three key investment themes that should continue to drive the long-term story in China, acting as megatrends aligned with China’s economic transformation. These include technology and green innovation.

“Innovation clearly goes beyond technology; it’s not only about software or hardware, but it’s also about helping the traditional industrial and manufacturing sectors.”

Within this, health and wellness, wealth planning and entertainment and premium consumer brands are targeted. And consolidation plays exist around industrials and advanced materials, especially given the energy transition theme.

As well as capital-cost pressures, the upgrading of China’s industrial structure and rising environmental costs represent other pressures, according to Tea. “So instead of only looking at companies and focusing on revenues, we believe that companies which are now presenting a more progressive mindset – focusing on cost, productivity, on R&D – are the ones that will thrive in the very long term.”

Besides the domestic and sectoral factors affecting many Chinese stocks, global macro threats from inflation and rising interest rates, the war in Ukraine and an impaired world supply chain have shaken investors.

Tea said inflation getting out of control would become “one of the major wild cards for China”.

Inflation has been relatively manageable so far, she said, especially compared to developed or emerging markets.

“China is probably one of the few economies where the inflation level has remained quite reasonable, so we believe that with manageable inflation, the easing approach is still on the cards for Chinese officials, despite the Fed raising rates.”

She added: “This doesn’t mean that there are no cost pressures. There are – especially in the mature spaces with rising geopolitical risk and the Ukraine/Russia situation. The prices and cost pressures will continue to rise, and it has already impacted a number of tech names. That is why we have decided in recent months to reduce our exposure in some names, although we remain very positive in the long run.”

Chen analyses the pass-through effects of the potential geopolitical risks on inflation. She believes they are now manageable. “We’ve seen more of the supply side of the shock impacting Europe, with Germany and Italy, and less so Asia.”