China vies with the US for the title of world’s largest economy - the Asian powerhouse accounts for about a third of global GDP growth and has the world’s largest population, at 21 times the UK – it’s a huge market that investors can't ignore.
Despite that, Chinese shares make up only 5% of the total emerging market index, so investors looking for high exposure to the country may have to shun the benchmark and find an active manager who can delve into the myriad opportunities available.
While the outbreak of the coronavirus has cast a dark cloud over the region, history tells us that such epidemics tend to have only a short-term effect on the stock market. For investors who can hold their nerve, that could mean there are long-term opportunities to be had.
“China is a nation that blends communism and capitalism; it is vibrant, dynamic and resilient,” says David Coombs, manager of the Rathbone Multi-Asset portfolio funds. “It continues to move from being a state-dominated, heavy-industry economy to one of private enterprise, services and consumption. This shift has been remarkable but there’s a lot of road for this growth to continue.”
Here we look at some of the sectors worth exploring:
Surveillance
There are an incredible 200 million CCTV cameras across China, but these days surveillance has moved beyond safety and security. Artificial intelligence is now adding new capabilities to what these cameras can do.
Those used in shops, for example, can help analyse the customers the store is attracting and how they move around it. They can determine the split between male and female customers and where the "hot" and "cold" spots in a shop are; what's more, these cameras are becoming increasingly accurate, even estimating the height and weight of people.
Ashley-Jane Kitchen, investment analyst at Walter Scott, part of BNY Mellon Investment Management, is very positive on the sector. She notes that Hikvision (002415) is "highly profitable, very cash generative and growing consistently at a fast rate" although she doesn't invest in it because of ESG concerns. The stock has a four-star rating from Morningstar analysts, who assign it a Narrow Moat Rating, indicating its competitive advantages over rivals.
Digital
There has been a drastic change in the Chinese consumer landscape in recent years. Where previously it was seen as an export-led country of manufacturers, increasing wealth has seen a sharp rise in the consumer, making the domestic population an increasingly important part of the growth picture. During Black Friday in 2018, for example, while US shoppers splashed out around $8 billion, Chinese shoppers spent an incredible $30.8 billion.
“That’s why the Chinese consumer is where we want to be focusing over the longer-term, rather than the China of old,” points out Coombs. “Chinese e-commerce blows many Western attempts out of the water”.
Alibaba (BABA) and Tencent (00700) are the main tech titans that dominate China’s digital economy. Dale Nicholls, manager of the Fidelity China Special Situations Trust (FCSS), has 12.9% and 13.1% of the portfolio respectively in these stocks.
The two companies have different business models: while Alibaba is an e-commerce platform similar to eBay, Tencent is a social media giant that also owns Wechat (the Chinese equivalent of Whatsapp), which has 1.1 billion users every month.
Tourism
Travel is another trend that has benefited from the growing wealth of much of the Chinese population. These travellers now spend $1 trillion per year, and account for around 20% of global travel.
Trip.com (TCOM), previously known as Ctrip, is the largest online travel agency in China – with an enviable market share of around 60%. Nicholls really likes this stock, which should be a prime beneficiary of the “a strong long-term structural growth driven opportunity” of tourism in the region.
While the spread of the coronavirus crisis in recent weeks has put many travel plans on hold, Morningstar analysts expect the industry to bounceback over the long-term. When SARS hit in 2003, for example, the numbers of airline tickets sold through Trip.com fell 36%. But sales rebounded to 180,000 the following quarter. Revenue at Trip.com fell more than 40% at the time, but rose 196% the following quarter.
Infrastructure
As tech becomes the centre of many lives, China’s internet infrastructure industry is among the fastest growing in the world.
Data centres in particular are a prime beneficiary of the structural growth in the demand of mobile phone, as well as cloud and IT services. Nicolls likes 21Vianet Group (217A), which provides real-time monitoring systems and data management services for companies.
Chinese cities, meanwhile, are almost unrecognisable from 30 years ago. Once flat landscapes are now sprawling cities, their skylines studded with huge skyscrapers. With more than 200 million people antipicated to move to cities over the next decade, Kitchen says one beneficiary of this urbanisation trend is lift and escalator-maker Kone.
A company Kitchen likes very much is Finland's Kone (KNEBV), a global leader in the elevator and escalator industry. China is the world’s biggest market for new equipment – accounting for more than 40% of world’s escalators and elevators and 66% of all new equipment.
