The trade conflict between China and the U.S. has the world on the edge of its seat. Robert Horrocks of the American investment company Matthews Asia talks about China’s new role and the valuation of Asian equities.
AsiaFundManagers.com: Mr. Horrocks, global free trade is in danger. Who is to blame?
Robert Horrocks: About two years ago, I gave a lecture on China and globalization. My main argument was that after Xi Jinping’s speech in Davos in January, 2017, China seems to be becoming the global champion of free trade, to the same extent that the U.S. and Europe turned their backs on this idea. My views have been received with great scepticism by some. “China is not serious about globalization,” was a frequent reaction. But today, we see the U.S. opening one front after another in the global trade war: Mexico, China, the European Union, Canada. My prediction is coming true, though I can’t say I’m happy about it.
AFM: You see China as the model pupil of free trade?
Robert Horrocks: China is certainly not a bastion of free trade, with free, unfettered markets or a state sector limited to the most necessary tasks. But the year I was born, China was a country with almost 800 million people. Almost everyone lived in extreme poverty. Today, 1.4 billion people live here, almost none of them in poverty. At that time, the vast majority of households had an income of USD 1.90 or less per day. Today, this is true of fewer than 10%.
China’s middle class is growing rapidly, due to saving, investing, and reforms of its economic and political systems. The state has implemented market prices and reduced state intervention in the economy. The country is increasingly opening up to foreign investment and trade. In the 1970s and 1980s, China still had a trade and current account deficit as it attracted capital and goods to build a new economy.
AFM: The Chinese government is pursuing an industrial policy agenda. Competition is being prevented in many areas.
Robert Horrocks: The reforms in China are a tremendous achievement, regardless of one’s view on Chinese government policies. The government owes its status and power to its ability to let ordinary citizens participate in the growth and incredible revolution of the standard of living. Chinese leaders have truly embraced globalization, capitalism, private enterprise and everything that goes along with it – bond markets, stock markets, foreign investment and free investment decisions for entrepreneurs. No, China is not a 100% free market, but what would that even look like?
AFM: How will the trade war with the U.S. affect Chinese behaviour?
Robert Horrocks: The Chinese state has great incentive to maintain its trade-friendly attitude. With the U.S. turning its back on free trade, what remains for China? Most likely, they will ignore the US and continue to open up. We see that already in the equity and bond markets. China should trade freely throughout Asia and the E.U. It should be the world’s global trading partner, a title the U.S. once held but no longer seems to want.
China’s economy under the new Silk Road
The “One Belt, One Road” initiative opens up new countries for trade and infrastructure. Freight trains from China to Europe via Central Asia supplement the established maritime routes through Southeast Asia and East Africa as well as air routes between East and West, placing China at the centre of world trade. Historically, countries in such a position prospered economically, socially and artistically, regardless of the era or religious environment.
AFM: Are we currently experiencing a tectonic shift in international trade?
Robert Horrocks: It depends whether the current U.S. stance on free trade continues. But it seems that we have reached a turning point in history. The U.S. is no longer the biggest proponent of free trade and globalisation. Nor has the European Union taken on this title. The role has fallen to China. It therefore remains an important reason to invest in the growth of Asia. China is not only the biggest contributor to world economic growth, but also the most important representative of international economic cooperation and development.
AFM: The trade dispute with the U.S. is real and cannot simply be ignored. What does this mean for Asian economies?
Robert Horrocks: The macroeconomic effects of the trade dispute are not as great as the headlines suggest. And the minimal effects that do exist can be avoided by investing in companies that serve domestic demand. Demand growth in Asia should remain strong. Investment and productivity gains will make wages rise higher and faster than in any other major region in the world in the coming years and decades.
High savings rates protect Asian economies
Asian economies have also bottomed out in their economic cycles, so they should be positioned for a cyclical recovery. A more favourable monetary environment could accelerate this growth. Many of Asia’s largest economies are supported by high savings ratios, making them less vulnerable to external events.
AFM: How do you currently assess the valuation of Asian equities?
Robert Horrocks: Asian shares, Japan excluded, are traded at an average P/E ratio of 12.7. Including Japan, the profit multiple is 13.0. This is an acceptable valuation level given the low interest rate environment and the cyclicality that drives company profits in Asia. Nevertheless, risks remain. Monetary expansion and the bull market in the U.S. have been going on for a very long time. It seems certain that the central bank will continue to tighten monetary policy. These factors are not creating the best environment for Asian markets.
AFM: So, investors would do well to wait and see?
Robert Horrocks: Investors shouldn’t take too negative a view. The prices of some Asian hype stocks have corrected in the meantime. The time has come for value stocks. There are good, solid companies whose shares are available at low prices. The coming months will remain volatile. I know from discussions with investors that most of them are already underweight, which should create opportunities for patient investors.
AFM: Mr. Horrocks, thank you very much for your time.