Ollie Smith: Now, you may have jitters over investing in China, but you may be surprised to learn that Morningstar Investment Management, our investment management arm, remains committed to the country. Here to tell me why is, senior investment analyst, Mark Murray.
Mark, thanks for joining us. Could you tell me, broadly speaking, what is Morningstar Investment Management's position in China at the moment?
Mark Murray: So, at the moment, we're sort of overweight relative to our kind of benchmark on neutral view. And I think if you look back at what's happened in China over the last kind of 12 months or a bit longer, it's gone from a situation of a lot of optimism to a lot of negativity. I think it started with some regulatory changes. There was a suspension of Ant Group, the IPO, there was some fines for Alibaba, and probably the most sort of dramatic was the sort of overnight change in the business model of education companies. So, they were instantly not allowed to profit from the school curriculum and that effectively wiped out businesses overnight. I think that created a lot of panic about just what the government can do, might do for other businesses, and that had a bigger effect on the sentiment of the market. So, at that point, we felt like it was a good opportunity to enter into the market.
OS: And which bits of the Chinese markets you find most compelling then?
MM: So, we find generally the sort of loosely speaking the technology companies that are most attractive. I think they're the ones that generally have pretty, what we would say, is very wide moat, so sort of good quality businesses but have been sold off due to this negative sentiment, due to this kind of fear of government intervention, but also with the zero lockdown policy just to kind of impact – the short-term impact on earnings going forward.
OS: And Morningstar has written a lot about the zero Covid policies. And I know that conversation is ongoing about what the potential impact in the future could be. What's the house view on the next 6 to 12 months with China?
MM: Yeah. I mean, we don't feel our edge in Investment Management team is really forecasting sort of political or sort of short-term economic changes. Rather, we tend to focus on sort of the long-term cash flows of these businesses. And when we look through that sort of 6 or 12 months, we see very high-quality businesses. And yes, there might be sort of bumps in the road, but over the long term, we think they're good valuations and it's a good entry point. So, yeah, we sort of try to kind of look through that period and believe in the long term these will offer good returns for investors.
OS: Just finally, you mentioned about moats. But what about valuations? I mean, presumably, these companies trade at attractive prices as a result of the sell-off. But how are you measuring valuation here?
MM: Yeah, sure. So, I think, generally, at the moment on most metrics many of you saw sort of attracted, but for us, we have our own internal valuation model where we'll look at the underlying cash flows of each businesses, and we'll look at the long term, what we think our long-term fair value is for those variables, and then we'll compare our fair value to the market price. And our model also takes into account – we think of probability, fair valuated impact on many of the risks which the market is scared about, but we've been aware of these risks for a long time. We don't think they are new risks. They just became realized. So, our process is sort of capturing that and believes that the market is sort of overdoing it, and we think the price is attractive to enter now.
OS: Thank you so much, Mark. For more on the case for investing in China, do check out Morningstar.co.uk or indeed, any of our international websites. Until next time, my thanks to Mark, I've been Ollie Smith for Morningstar.
