Schroders China A-shares Fund Manager Jack Lee : Where are the Best Investment Opportunities in China?
May 2023 – This is an expert commentary on investment opportunities in China – Where are the Best Investment Opportunities in China? by Jack Lee who is the China A-shares Fund Manager at Schroders.
Founded in 1804, Schroders is one of Europe’s largest independent investment management firms by assets under management. As at 30 June 2022, assets under management were £773.4 billion (€898.4 billion; US$939.2 billion). Schroders has continued to deliver strong financial results. It has a market capitalisation of circa £7.7 billion and employs over 5,800 people across 38 locations. Schroders offers innovative products and solutions across their five business areas of solutions; institutional; mutual funds; private assets & alternatives; and wealth management. Clients include insurance companies, pension schemes, sovereign wealth funds, endowments and foundations. They also manage assets for end clients as part of their relationships with distributors, financial advisers and online platforms.
Where are the Best Investment Opportunities in China?
Jack Lee: Chinese shares have had a good run recently with gains spurred by the country’s reopening after the relaxation of Covid measures. Government support for the property sector has also aided equity market returns, as has a stabilisation of the regulatory environment for internet stocks.
But even after the recent gains, we see several themes that could potentially drive longer-term gains for Chinese equities.
” Government support for the property sector has also aided equity market returns, as has a stabilisation of the regulatory environment for internet stocks “
Reopening Theme is Still Playing Out
Jack Lee: The China re-opening theme has not fully played out. After all, the re-opening has been swift, and it takes time for corporates and consumers to adjust to such a significant change.
We expect that the fast-paced relaxation of Covid-related measures in China will provide substantial support to the recovery in consumer spending, which in turn will support domestic earnings in many sectors. Among those we see as the main beneficiaries is the food and beverage sector. Increases in dining out as people start to socialise more will drive higher demand for food and drink products. Advertising will be another winner, as the increased opportunities for consumption should lead to higher spending on advertising and marketing by corporates. Possibly a less obvious beneficiary is the insurance sector. We anticipate an uptick in policy sales as insurance sales agents can carry out face-to-face sales meetings again.
While the re-opening theme is still playing out for now, we will start to see normalisation of demand in these sectors in the coming months. However, the attraction of Chinese equities extend beyond opportunities arising from the near-term reopening. The “regime shift” occurring across the globe in terms of de-carbonisation, investment in technology, and increased government spending is also taking place in mainland China. These shifts will take place over the medium to long term and, in our view, can support significant growth for companies with exposure to these themes.
” main beneficiaries is the food and beverage sector. Increases in dining out as people start to socialise more will drive higher demand for food and drink products. Advertising will be another winner “
3 Long-term Themes to Watch
1. Electric vehicle supply chain
Jack Lee: As the effects of climate change become more evident, the de-carbonisation drive is increasingly important for markets around the world. The need to switch to electric vehicles (EVs) is an aspect of this, and an area where we think China offers particularly interesting exposure for investors.
China is a global leader when it comes to supplying the EV value chain, and also when it comes to demand for the finished vehicles. A staggering 57% of all EVs sold globally in 2022 were sold in China.
Within the EV supply chain, there are a number of companies who are building dominant positions in their respective niches. Take a producer of key components for battery and motor temperature controls in EVs as an example. It commands a c.60% global market share in the air conditioning valve industry, and a greater than 90% share in the EV valve industry. Clients include global EV specialists like Tesla as well as original equipment manufacturers (OEMs) like Ford and BMW. As EVs continue to take market share around the world – helped by regulations – there is good visibility on the company’s growth potential.
2. Technology self-sufficiency
Jack Lee: Rising tensions between the US and China have manifested in the technology sector. The supply chain blockages during times of extensive Covid measures and logistical difficulties are a further impetus behind the move to localise production closer to end markets.
There are selected players in the Chinese technology sector that we see as beneficiaries of this accelerating localisation trend. One is a leading domestic computer-aided design (CAD) software provider. China’s CAD market size is increasing steadily on the back of industrial digitalisation.
3. Healthcare infrastructure
Jack Lee: Expanding hospital capacity and other healthcare infrastructure is a key government priority now. Meanwhile, the localisation theme also means that domestic healthcare equipment providers should reap the benefits, rather than foreign suppliers.
An example of the kind of company we see benefiting is one engaged in the research & development, production, and sales of digital X-ray detectors. As a market leader in its field, it is well positioned to benefit from both the foreign substitution trend and increasing government spending in mainland China.
In short, we see 2023 as one of recovery for Chinese shares as the key overhangs of the past few years have been removed. Lifting the Covid lockdowns, providing support for the property sector, and a more stable environment for internet company regulation are factors that can aid near-term recovery. However, China can also count on the longer-term growth themes mentioned above. The key for investors will be identifying the specific companies who will be the winners.
This is an expert commentary on investment opportunities in China by Jack Lee who is the China A-shares Fund Manager at Schroders.
Important Information
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited. Schroder Investment Management (Hong Kong) Limited Level 33, Two Pacific Place, 88 Queensway, Hong Kong www.schroders.com.hk
About Schroders
Founded in 1804, Schroders is one of Europe’s largest independent investment management firms by assets under management. As at 30 June 2022, assets under management were £773.4 billion (€898.4 billion; US$939.2 billion). Schroders has continued to deliver strong financial results. It has a market capitalisation of circa £7.7 billion and employs over 5,800 people across 38 locations. Schroders offers innovative products and solutions across their five business areas of solutions; institutional; mutual funds; private assets & alternatives; and wealth management. Clients include insurance companies, pension schemes, sovereign wealth funds, endowments and foundations. They also manage assets for end clients as part of their relationships with distributors, financial advisers and online platforms.. Visit: www.schroders.com.hk
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