China offers fruitful investment opportunities

The year 2022 Tiger in China presents five major themes for which investors have every reason to position themselves.

The strength of China’s vast consumer market, coupled with domestic policies that drive growth, should provide investors with some fruitful opportunities to seize during the tiger year.

Lunar New Year symbol starting from 1er February is a zodiac tiger.1 Tigers are highly regarded in Chinese culture for their strength. They are also related to health and can be a good sign in a pandemic situation.

But what investors may see as the greatest source of optimism about China over the next year is the legendary instinct of these creatures, allowing them to set their course. It’s an instinct.

Unlike developed markets such as the United States and the United Kingdom, where authorities are tightening policies to curb inflation, China is taking steps to ease its financial position and access to finance. Chinese politicians are well-positioned to support the economy through fiscal and financial measures without inflation compromising the purchasing power of local consumers.

Unlike developed markets, where authorities are tightening policies to curb inflation, China is easing fiscal conditions and access to finance.

The COVID-19 pandemic has curbed China’s consumption over the past two years, but the size of the market means that even timid retail sales growth is producing an absolute significant increase. The Chinese consumer market is projected to outpace the US consumer market by 2040.2

Beijing powers continue to support economic self-sufficiency. Sharing prosperity remains an important subject, but authorities have recently reaffirmed that income redistribution is a secondary consideration for long-term economic development.

Our economists believe that China will maintain an aggressive zero-tolerance approach to COVID in Tiger’s year, at least to protect itself from the higher infectivity of Omicron variants. This can have a negative impact on the global supply chain.

If major COVID outbreaks continue, investors will be able to grow and inflate across countries, depending on domestic supply and demand dynamics, regional COVID conditions, relative policy parameters, and trends in global commodities and services sectors. , You can expect an increase in policy differences.

I thought investors’ reaction to the new regulations in China last year was indiscriminate. The new economy continues to be an important part of China’s vision of a modern consumer-led economy. That is, investors should not expect severe oppressive measures. The private sector is essential to achieving the goal of China becoming a relatively prosperous country by 2035.

In the future, we believe that China’s commitment to COVID will not only enable people to return to normal, but will also create situations that will cause bouts of volatility. Nevertheless, we believe that any difficulty is short-lived. This does not change the government’s commitment to revive China’s consumption. In our view, investors can benefit from their exposure to this structural trend.

For the next year, they will have to look the same as tigers. In short, you need to pay attention to development and be prepared to seize the opportunity to capture growth. It has the brightest prospects for companies that adapt to changing regulatory frameworks and are in line with policy goals in areas such as digital innovation, green technology, affordable healthcare access, and better living. Here are five themes that investors can bet on at this year’s Tiger.

  • desire: As China strives to establish a self-sufficient economic model, we hope that consumer products will work. We believe in the story of “premiumization”, where urbanization and rising middle class affluence drive demand for premium products and services in the long run. We have placed a portfolio to harness the wealth of the middle class. The government has taken steps to limit living expenses, but I don’t think it will limit high-end discretionary spending. We remain optimistic about regulatory risks in the white liquor (premium liquor) segment. Competition in this sector is healthy, the price range is wide (no monopoly), and white liquor producers are one of the largest taxpayers in China’s poorest states.
  • Digital: This theme is in line with the government’s goals of localization, increased productivity, reduced costs, increased innovation and contribution to economic growth. Our holdings in this segment are primarily software brands. Chinese companies have an advantage in this area because they prefer knowledge of the domestic market and localization in areas such as cybersecurity and cloud services. Cybersecurity and data security are also important elements of national security and should help enhance localization and self-sufficiency.
  • Ecology: This theme is in line with the government’s policy of decarbonization and carbon neutrality by 2060. China dominates the world’s renewable energy generation and storage capacity, accounting for 90% of solar energy capacity and 75% of battery capacity. The decarbonized economy requires huge investment in renewable energy and storage, which puts it in a good position to benefit China. As other industries need to contribute to decarbonization, investment in machine modernization and energy efficiency is expected to increase. Our positions include solar panel makers, component makers, battery and related component makers, automation-related businesses, and companies focused on modernizing the power grid for the future of renewable energy.
  • health: We are overweight medical services, including companies that provide innovative research and clinical trial services to bring high quality therapies to market cheaply and quickly. Our position is in line with the policy goal of making health care cheaper and more accessible, which is important given the rapidly aging Chinese society. We also hold a position in a series of ophthalmic hospitals that voluntarily provide ophthalmic care to private patients. We underestimate pharmaceutical companies because they believe that pressure on drug prices increases regulatory risk. Localization of healthcare manufacturing and delivery equipment is another area where we are finding opportunities.
  • wealth: This theme is in line with China’s political goal of becoming a relatively prosperous society by 2035. The financial services sector plays an important role in the creation and protection of wealth. Our holdings in this sector contribute to the creation of strong financial and capital markets, including the highest quality retail banking franchises in China and software names that support the development of capital markets such as trading and portfolio management. In China, insurance service adoption remains low compared to the rest of the world. Especially with the aging of China’s population, there are significant potential markets for life and health insurance. We believe that recent sanctions on online insurance will benefit higher quality companies and improve the overall standard of the insurance industry.
1 In the Chinese zodiac, animals are used to represent a year with a 12-year cycle.
2 abrn laboratory, December 2021