China presents some compelling investment opportunities, especially in the onshore A-Share equity market. We talked to Ben Morris, Senior Equity Investment Specialist, Aberdeen Standard Investments, about recent investment opportunities in China.
AsiaFundManagers.com: What is your investment approach in China? How do you find attractive stocks?
Ben Morris: Careful company due diligence lies at the heart of our investment process. We look to determine a company’s quality first before we check valuation. We define quality as a strong balance sheet, sustainable earnings, progressive management and good governance. We avoid companies trading at multiples their earnings don’t justify. We tend to favour industry leaders with a sustainable competitive advantage. Our approach is about being patient and investing in quality.
AsiaFundManagers.com: Is a lack of information in China a handicap for investors?
Ben Morris: It can be. Data is often unreliable and transparency and disclosure standards poor. That’s why it’s paramount to understand a company’s business structure and parentage and get to know its management team. There’s no substitute for experience of investing on the ground. Investors need to engage management teams in Standard Mandarin to assess the opportunities and risks fully. It improves the chances of investing in long-term winners and avoiding corporate failures and scandals. We prioritise speaking to companies. In instances where disclosure is weak, information gathering will give us an advantage over competitors.
AsiaFundManagers.com: What are the most interesting industries in China? Who benefits from the new middle class?
Ben Morris: As the country transitions away from reliance on exports, its growth over the long term will be driven by domestic consumption and a rising middle class. The key to unlocking shareholder value is identifying the companies that can tap into these growing disposable incomes. China’s 380 million millennials are earning and spending more than their parents ever did on leisure and travel. Increased spending power is driving demand for premium products ranging from electric appliances to cars and even high-end liquor. We also see structural demand for insurance and wealth planning. These are some of the things people demand as they get richer.
AsiaFundManagers.com: What trends are emerging in the Chinese economy?
Ben Morris: Policymakers are steering the economy away manufacturing and exports to reliance on domestic consumption and services. The latter make up more than half of China’s GDP growth today. While growth is slowing, the economy remains underpinned by rising wealth, urbanisation and a huge domestic market. At the same time, policymakers are liberalising their capital markets to facilitate growing integration with the global economy. This should hasten structural capital inflows. Over time, China’s liberalisation has the potential to reshape international capital markets.
AsiaFundManagers.com: What effects will the trade conflict have on Chinese equities in the short, medium and long term?
Ben Morris: To counter slowing growth, the government is rolling out stimulus measures to spur investment activity and consumption, boosting near-term sentiment. We also expect a positive impact from tax cuts to filter through, although the benefits could be fragmented. Stock-picking will remain essential in generating excess returns in this market. Over the long term, we’re confident that domestic growth driven by a rising middle income population will continue to power local company earnings and valuations, with China still at the start of its economic recovery in historical terms. Most A-share stocks that we hold are domestically focused. Their customers and supply chains are largely based in China, so the bulk of their revenues and costs are renminbi-based. This can help to insulate them from the trade war.
AsiaFundManagers.com: Thank you very much for the interview.
Senior Equity Investment Specialist
Aberdeen Standard Investments
Ben Morris, Senior Equity Investment Specialist, works closely with the equity desks to support the commercial growth and development of the Aberdeen Standard Investments Equity franchise. Ben has 19 years of experience in the industry.