Navigating Uncertainty: Insights from the 'Anything But China' Conferences
In September, our Global Equity team's Investment Analyst, Caileigh Faure, attended two conferences held in Hong Kong which investors have dubbed the 'Anything But China' (ABC) conferences. Experts gathered to delve into the current state of China's economy and its impact on global markets. Despite China being unloved, it remained the focal point of most discussions, particularly around the concerns and uncertainties that have been plaguing investors. This article explores key takeaways from these conferences and attempts to shed light on the complex dynamics surrounding China's economic landscape.
China's weakening sentiment
One recurring theme was the prevailing bearish sentiment towards China. Investors, while acknowledging that China may appear optically attractive, also expressed a sense of caution. Many believed that this caution was not without reason, hinting at underlying issues that cast doubt on China's economic stability. These issues ranged from poor consumer confidence, low credit growth as consumers continue to favour saving over spending and the record-high youth unemployment rate which has been widely reported on. On the flip side, urban unemployment rates have started to return to pre-Covid levels and consumption is actually outpacing income growth YTD, both of which offer a glimmer of hope.
Geopolitical tensions
The strained relations between the United States and China were a central topic of conversation. Discussions covered scenarios ranging from war to non-war, emphasising the use of "small yard high fence" policies imposed by the US. These policies entail strict controls on exports and trade with China, particularly in areas such as leading-edge technology. Questions arose regarding the true intentions behind these restrictions, with some speculating on whether they aimed to slow down China's growth rather than solely focus on national security concerns.
India vs China
With investing in China becoming increasingly complex, foreign investors have begun shifting their focus away towards the robust economic growth of India. This shift has propelled India to the fifth-largest stock market globally, after the United States, China, Japan, and Hong Kong. Valuations reflect this sentiment too: the average PE NTM (price to earnings over the next twelve months) multiple for the Indian stock exchange in September was 22.3x, nearly double the average PE NTM multiple of the Shanghai stock exchange[1]. Ultimately valuations in China have been hampered by weak domestic sentiment, poor economic data and strained geopolitical tensions but these collapsed multiples also represent an opportunity as we begin to lap tougher 2023 metrics.
Consumer behaviour
The current state of the consumer was another key area of interest at the conferences. Notable trends included increased consumer spending on gold products in China, driven by market uncertainties and a perception of gold as a safe investment. Additionally, domestic travel in China had rebounded to pre-pandemic levels, with a particularly strong resurgence in July and August. However, international travel remained constrained due to flight and visa restrictions.
The premium segment in China's consumer market remains resilient, while the middle-income group faced more significant challenges, dealing with salary cuts and job losses. This divergence highlighted the varying impacts of economic conditions on different consumer segments.
Financial Services
A meeting with United Overseas Bank, a Singaporean bank with exposure to cross border investments in the ASEAN region highlighted that management are seeing all companies holding back from big capital investments which is something they expect to continue through the second half of this year. Interestingly, the Chinese government has been clamping down on fund flows out of China and tourist spending, even blocking legitimate money from leaving. Chailease, a Taiwanese based SME lenders’ delinquency ratios have been rising in all three of their main regions, China being one of them, which they attribute to the current weak macro and has forced them to increase provisions against delinquencies in the future.
Conclusion
The conferences provided valuable opinions and differing perspectives of the current state of China's economy and the various global repercussions. While sentiment towards China remained weak, there are reasons to believe that the macro situation is not as bad as the narrative being portrayed in the Western media. As global dynamics continue to evolve, the insights on China’s economic landscape, geopolitical tensions and the varied impacts on different segments and industries will remain crucial for investors and policymakers. We remain cautiously optimistic on the stocks that we follow in Asia as we continue to opt for businesses that align with our robust bottom up investment style. As a reminder our stock selection process is focused on identifying the following characteristics:
- Durability: Do we have high confidence the business will be operating in at least 10 years’ time?
- Opportunity: Can the business grow free cash flow per share?
- Alignment: Is management operating in a way that potentially maximises free cash flow and minimises manageable risk?
- Valuation: Does the current share price mean that the opportunity outweighs the risk of owning the stock?
The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security.
All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
