Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Fears renewed amid Chinese sell off, as global equity funds hit
The sell-off in Chinese equities has garnered all the headlines this week, as President Xi Jinping and the Chinese Communist Party (CCP) extended their regulatory crackdown. Among the hardest hit this week was the country’s booming home tutoring and private education services sector, with the likes of TAL Education (NYSE: TAL) falling as much as 70% in a single session.
The reason?
The Party decided these companies should no longer be able to profit from the education of children. In a way, it makes some sense. According to global research firm BCA Research, the driving reason behind the latest crackdown is to “alleviate the financial burdens on middle-income households.” Effectively, the government is seeking to cut the cost of raising children, and other aspects of parents’ lives, in the hope of offsetting weakening demographics.
Unfortunately, the sell-off didn’t end there, with ride-hailing platform Didi (NYSE: DIDI) being hit with a crackdown on its data collection despite only listing a few weeks ago; while gaming behemoth Tencent (HKG: 0700) also saw a number of royalties businesses impacted. Naturally, these events tend to bring long-held fears of the unknown to the front of mind once again for investors. The difference today compared to a few decades ago, is that many of these Chinese companies are now of a global scale, and are therefore present in many highly popular global equity portfolios.
For instance, Nick Griffin of Munro Partners, the $3 billion equity manager, has been on the front foot this week confirming that its Alibaba (HKG: 9988) position, which was the largest holding in October 2020, had been reduced significantly in recent months and has now been removed completely from the manager’s portfolio. While highlighting he remains confident on the outlook for China, Griffin is wary of the short-term uncertainty for these massive global names.
Stepping back, the regulatory crackdown appears to be a step in the right direction, at least compared to the experiences of the US. Consider for instance that the US is only now seeking to break up the likes of Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOGL), and Facebook (NASDAQ: FB) due to their incredible market dominance, but clearly has little hope of doing so. China, on the other hand, is decades ahead and not concerned about the impact on these companies’ valuations.
By now, the opportunity set in China is widely appreciated. The Chinese middle class will be the most powerful force in consumer spending for decades to come, while the economy remains the fastest-growing in the developed world (although China remains technically an emerging market.) Despite its size and scale, it still represents only a small portion of the popular MSCI World Indices and similarly, the companies within this index are typically only the largest technology giants that are the subject of the current scrutiny.
So, what should investors be doing today?
In my view, it’s time to pivot, for lack of a better word. In domestic equities, we speak about market rotations every day. That is moving from value to growth, defensives like healthcare to cyclicals like mining and many other iterations. A similar approach should be used in China and Asia more broadly today.
The days of achieving exposure to China and Asia through non-Asian companies are over. You only need to consider struggles faced by market darlings A2 Milk (ASX:A2M) and Treasury Wine Estates (ASX:TWE) in recent years as evidence of this.
I’m advocating that investors use this opportunity to adjust their exposure to Asia by focusing on investing in Chinese companies selling to Chinese people (and the rest of the world), and the same throughout the region. If we look back at our own history, our consumption story typically begins with buying the best-known products we have seen on TV, which eventually stimulates opportunities and industry within our own country. This is clearly on show in China at the present time with companies like Li Ning (HKG: 2331), a competitor to Nike (NYSE: NKE, Xiaomi (HKG: 1810) to Apple (NASDAQ: AAPL), and Feihe (HKG: 6186) to A2 Milk, seeing significant domestic demand while gaining market share.
These aren’t simple decisions and, being equity investments, will always be subject to significant volatility and risk, however, the growth opportunity is obvious. The diversification benefits are less appreciated but particularly important as the number of both ASX-listed and globally listed companies trading at significant valuations shows no signs of abating, despite a weakening economic backdrop.
