In de berichtgeving over de opkomende markten ging de grootste aandacht de afgelopen dagen uit naar de gevolgen van de verkiezing van Donald Trump tot Amerikaans president. Maar een veel belangrijker gebeurtenis is de openstelling van de beurs van Shenzhen via de verbinding met de beurs van Hongkong. Westerse beleggers moeten deze ontwikkeling niet onderschatten.
Today, China launched the Shenzhen-Hong Kong Stock Connect. Together with the existing Shanghai-Hong Kong Stock Connect, these programmes offer the only direct way for foreigners to invest in mainland Chinese equity denominated in renminbi. Given this landmark opportunity to invest in China’s Shenzhen exchange, it has been surprising for us to see the numerous articles devoted to U.S. President-elect Trump and comparatively very little about the Stock Connect programme. For investors in emerging markets equity, the latter has the power to transform the asset class while the former targets the repatriation of manufacturing jobs to the U.S.
The two Connect schemes give access to more than 50% of China’s market capitalization, with around 1447 eligible stocks. As of the end of October 2016, the year-to-date Shenzhen and Shanghai turnover represented around 22% of global stock exchange turnover, which at US$16tr is by far the highest in the world; an unsurprising fact considering that China makes up about 15% of the world economy. Yet only 1% of the Chinese market cap is in the hands of foreigners – as opposed to 23% in Russia, for example, which in our view offers a less attractive equity market. In comparison, a full inclusion of A-shares into the MSCI Emerging Markets index would leave China with a hefty 40% weighting in the index.
Perhaps the lack of focus on the Connect programme is due to investors not trusting China because they don’t understand it? With a presence in Hong Kong for the past 20 years, Comgest has gathered experience on the ground to understand the pitfalls and opportunities, from governance risks to ample growth. China today is much more than just “the manufacturing centre of the world”. The middle class is growing and the strength of services is a reality. In areas such as online gaming, digital advertising and internet innovation, China is proving to be a serious global competitor.
Moreover, the government is delivering on reforms and opening their capital account. Via the Connect Program, not only can foreigners buy Renminbi-denominated mainland shares, but the Chinese can buy Hong Kong dollar-denominated shares. While the press frequently publishes rumours of a fear of capital flight, is this a real worry? On the contrary, and in fact, the Renminbi has proven to be one of the most stable currencies for the past two decades.
All that said, selectivity is key. The very high dispersion of returns means more alpha opportunities for active managers. We are currently observing 50 mainland Chinese stocks in our investment universe. With a 3% annualized outperformance* over the past 3 years, China has been the predominant driver of our Comgest Growth Emerging Markets fund** .
In our view, here are some intriguing stock examples in China*** :
Baidu is China’s Google with a dominant share of the online search and video markets. It has an online auction platform that allows the company to attract digital advertising money. China already represents around 20% of the global mobile digital advertising market since the internet is the dominating advertising platform in the country – well ahead of other developed markets. In a recent MIT Technology Review**** , Baidu was ranked the second most innovative company as a result of the accuracy of its speech recognition technology – outperforming Google’s software. Innovation has been, and continues to be, the key to Baidu’s success.
Kweichow Moutai is the market leader of the high-end Chinese liquor market. Production of this specialised liquor is limited to the Moutai region in the Kweichow Province. Kweichow successfully transitioned from being the official banquet liquor of the Chinese military to a strong brand preferred by the Chinese middle class. Branding and distribution skills have been the key to this successful transformation. As shareholders themselves, management’s interests in long-term growth are aligned with those of minority shareholders.
China Life is the leader in the Chinese life insurance market, owning one out of every four policies. With more than one million exclusive distributors, the company has the dominant footprint in the country. The growth of its insurance premiums has been in the high -teens over the past 5 years and its quality – in terms of higher shares of recurring premium business and life and health products versus lower shares of pure savings products – has been consistently improving according to annual company reports. That should not be a surprise given the rising wealth of the Chinese and the seemingly unchanging rudimentary nature of their retirement systems.