…what makes us different on the Emerging Markets team at Martin Currie is that we have a high level of active ESG engagement with all our investments and this includes our Chinese holdings.
Paul Desoisa busts a few myths on the Chinese economy and answers key questions on exports, government ownership and ESG.
- The strict criteria used to evaluate Chinese companies – including ESG factors
- Examples of global success stories that are in the portfolio
- The scale of the secular growth opportunity
The insurance opportunity in China is massive as only 8% of Chinese adults have life insurance compared to 60% in the US.
Paul: Hi everyone and thanks for listening in to this podcast. Let’s start with a very quick update on the markets and the strategy, before tackling the podcast’s main topic. So the Emerging Markets market has continued to recover from the lows seen in March as economic activity continues to bounce back, particularly in Asian Emerging Markets, which represent more than 70% of the Emerging Markets index1. Obviously we continue to monitor the risks of a secondary outbreak, however our strategy continues to perform well as we invest in those franchises, where we have confidence in the long-term sustainable growth opportunity.
Today the aim of this podcast is to bust a few myths on some topical questions we get asked when it comes to investing in China. I want to start the myth busting by covering a few quickfire questions that we get asked a lot.
The first one is regarding exports - we hear a lot about the Chinese economy being dominated by exports, so we are often asked what percentage of China’s GDP do exports of goods and services represent?
The answer is less than 20%.2 People seem to always assume it is much higher with this underlying belief that the economy is dominated by exports. The peak was 34% in 2006, so we have witnessed a significant decrease over the last 14 years.2
Another topic often discussed is how we can get comfort with Chinese financial statements and our approach to ESG (Environmental, Social and Governance factors) when dealing with Chinese companies. The general underlying belief here is that it must be extremely difficult to gain any comfort with any Chinese accounts and ESG just doesn’t matter to these firms. An insightful question could be:
- How many of the Chinese stocks owned in the strategy are audited by a big 4 accounting firm AND will publish an ESG report this year?
The answer is every single company except one company who uses Grant Thornton as their auditor, which is another of the world’s largest accounting organizations. And we assess the quality of those published accounts and the interpretation of the accounting standards like any other company we research with our accounting diagnostic frameworks. With regards to ESG, we assess their published materials and as we have explained before, what makes us different on the Emerging Market team at Martin Currie is that we a high level of active ESG engagement with all our investments and this includes our Chinese holdings.
And the final couple of questions I want to cover straight away is about government ownership in China, so a typical question is:
Out of the 13 Chinese stocks in the strategy how many of them does the government have some share of ownership?
The answer is 4. And people often ask isn’t any form of government ownership a bad thing? Well sometimes this leads to a different set of priorities or sub optimal governance, but there can also be some advantages to being invested alongside the government. Whilst the majority of our holdings are privately owned, we assess it on a case by case basis.
Take the company called China Gas, which the government does have some share of ownership. This business is about replacing the use of highly pollutive coal with cleaner natural gas throughout China. I’m sure you will have seen pictures of the amount of smog that can cover the skyline at times in China.
This company is making significant investments for the long term in the physical infrastructure to solve this huge environmental problem, but it also needs to make an appropriate return on the capital invested. From the government’s point of view, share of ownership means they benefit financially from the success of the company, but also, they tackle the environmental challenges they face. This is a huge challenge.
From the company’s perspective, it has a greater chance of being allowed to make the appropriate return on capital over the long term as their regulator (i.e. the government) is benefitting. And as shareholders, this can lead to a positive share price outcome, and it has done thus far.
People seem to always assume it is much higher with the underlying belief that the economy is dominated by exports.
Sophie: Tell us more about the stocks we own in China, why we feel investing in the market is such an attractive opportunity for our clients and you can continue to bust some myths along the way.
Paul: Well as you know we run a balanced portfolio that looks for quality growth companies and ESG is integral to our assessment of every business we look at.
Ultimately this leads us to own companies with three things:
- Firstly the company has to have a competitive advantage,
- Secondly the company has to have a multi-year growth opportunity and
- And thirdly the company has to have the governance and sustainability characteristics needed to succeed over the long term.
When it comes to the investment opportunity that China presents us it means investing in the likes of Meituan Dianping, the leading Chinese food delivery business with 450m users using their platform3, or Ping An insurance, the leading Chinese life insurance business. Did you know they have agent workforce of 1.2m insurance agents?4 The insurance opportunity in China is massive as only 8% of Chinese adults have life insurance compared to 60% in the US.5
These are new economy, secular growth opportunities that our clients benefit from by investing in China. The opportunity is so large that I suspect that when we look at these businesses in 5-10 years’ time, they will still have a strong growth opportunity ahead of them.
Sophie: That’s really interesting, but what about Chinese exporters? Do we own any? And if so, will they not be impacted by the so called deglobalisation theme?
Paul: Yes I’m glad you asked me that Sophie. So we do own some Chinese companies that export their services outside of China. Take the company called Minth, which is a world leading automotive component player and owned in the strategy.
Currently 13% of their sales are generated from the US market. Their client base is extremely large and includes General Motors, Ford, Fiat Chrysler, Daimler, VW the list continues,
Out of this 13% of US sales, c50% is exported from China, c21% from Mexico, c3% from Thailand and c26% is already manufactured in the US.
The company already has a global diversified manufacturing base across countries such as China, Thailand, Serbia, the UK, Mexico and the US. The company will continue to expand its presence and as shareholders we are comfortable with this.
Just like when you look at an American auto parts company like Borg Warner. Whilst headquartered in Michigan, they have 67 locations across 19 different countries.
Interestingly, today 27% of Borg Warner’s sales come from Asia Pacific but 70% of their backlog, which will drive the future growth, is being generated by Asia.6
In many ways these two auto part manufacturers, one Chinese and one American, are not too dissimilar. They are world leaders in their industry, and they operate from global manufacturing bases, where they are close to their clients in each geography. I don’t suspect this is going to change dramatically in the future despite what you read about the end of globalisation.
Separately and quite ironically, most of the growth opportunity that a US company like Borg Warner is seeking to exploit is in Asia. Remember I said 70% of their backlog is coming from Asia.
Well as an individual you can also participate in that Emerging Markets growth opportunity. But instead of having to pivot a business towards Asia like Borg Warner is doing, so it can benefit in the future, you can access the Emerging Markets growth opportunity today by investing in a dedicated Emerging Markets strategy which invests in quality, growth companies. The fact that there is an ever-increasing amount of these global leaders in Emerging Markets just makes it all the more exciting to invest in Emerging Markets. Specifically, two-thirds of our Emerging Markets portfolio holdings today have world leading intellectual property
I just wanted to conclude by reiterating our main points discussed, that investing in China follows the same well-designed investment process that we apply consistently across the investment opportunity set.
Our industry leading ESG credentials, with engagement at the heart of our approach, are utilised just like when assessing all our other non-Chinese holdings. And we have had lots of positive ESG engagement outcomes with Chinese companies.
Finally, we invest in quality growth companies and China simply presents a significant amount of these opportunities that we feel are underestimated by the market and we want our client base to be able to take advantage of that.
And with that, this concludes our lockdown podcast series and so on behalf of everyone on the Martin Currie GEMs team, thank you for listening.
1 Source: MSCI Emerging Markets Index
2 Source: WorldBank - Exports of goods and services (% of GDP)
3 Source: Meituan company stock notes
4 Source: Ping An company stock notes
5 Financial Times and LIMRA
6 Source: Borg Warner company stock notes
Regulatory information and risk warnings
Past performance is not a guide to future returns
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.
The opinions contained in this recording are those of the named manager. They may not necessarily represent the views of other Martin Currie managers, strategies or funds. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
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Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.