Investment Insight
Fishing for Stocks in China
 
 

Investment Insight

Fishing for Stocks in China

 

Our location in Hong Kong gives us a unique perspective on the risks and opportunities of investing in China, a market we believe is ripe with opportunity for bottom-up stock picking, particularly in the consumer, internet, healthcare and education industries.

China offers vast opportunity to investors willing to extend their time horizon and take a long-term view. Regardless of the consensus view that short-term real gross domestic product (GDP) growth is slowing, China represents nearly 1/5 of the world’s population and 1/6 of the economy; yet is under represented by global equity indices at just 2.3 percent of the MSCI All Country World Index. In the years ahead, we expect that gap to narrow as China’s economy evolves and innovative companies address China’s growing demand for consumption and services thus necessitating an increase in index weightings for China.

 
 
 
 

Source: Morgan Stanley Investment Management/FactSet, United Nations Population Division, IMF and MSCI. Data as of March 31, 2017.

 

 

China’s economy is undergoing a massive transition from fixed asset investment in heavy industry and manufacturing to growth in consumption and services. The contribution to GDP from consumption has averaged 4.7 percent over the past decade, and in the last five years has accelerated from 3.6 to 5.3 percent as of the first quarter of 2017. China’s consumption growth provides investors with a baseline to expect from the economy going forward: even without the benefit of growth in investment or exports, the world’s second-largest consumer will likely continue to grow faster than the developed world in the years ahead based on consumption growth alone.1

Over 800 million people have emerged from poverty in China since market reforms were introduced in 1978.2 This emerging middle class wants what those in developed markets have long enjoyed and perhaps take for granted: higher-quality consumable products such as food and beverages, internet services to share experiences with family and friends, access to healthcare and better education opportunities for their children.

After three decades of rapid real GDP growth driven by fixed asset investment in heavy industry, China is adjusting to a more moderate pace driven by consumption and services. Rebalancing the world’s second-largest economy is not without its well-known challenges, but as bottom-up investors we look through the short-term macro noise and have been finding plenty of high-quality stocks in China. Therefore, we believe that if you want to find some of the best bottom-up stock ideas of the next decade, then look to China because as Charlie Munger, Warren Buffett’s long-time partner said about China, “It’s a happier hunting ground.”3

Risk Considerations
There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in these portfolios. Please be aware that these portfolios may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact these portfolios to a greater extent than if these portfolios’ assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds (ETFs), the portfolio absorbs both its own expenses and those of the ETFs it invests in. Supply and demand for ETFs may not be correlated to that of the underlying securities. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Asia market entails liquidity risk due to the small markets and low trading volume in many countries. In addition, companies in the region tend to be volatile and there is a significant possibility of loss. Furthermore, because the strategy concentrates in a single region of the world, performance may be more volatile than a global strategy. Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk). Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. To the extent that the Fund invests in a limited number of issuers (focused investing), the Fund will be more susceptible to negative events affecting those issuers and a decline in the value of a particular instrument may cause the Fund’s overall value to decline to a greater degree than if the Fund were invested more widely.

 
Managing Director
 
 
Executive Director
 
 
Executive Director
 
 

INDEX INFORMATION

The MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The MSCI China Index captures large and mid-cap representation across China A-shares, B-shares, H-shares, Red-chips and P-chips. It reflects the Mainland China and Hong Kong opportunity set from an international investor’s perspective.

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The document is a general communication which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

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There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Except as otherwise indicated herein, the views and opinions expressed herein are those of the portfolio management team, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

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1Source: CEIC. Data as of March 31, 2017.

2Source: World Bank, China Overview as of March 28, 2017.

3Source: Charlie Munger, Vice Chairman of Berkshire Hathaway; 2017 Annual Meeting. As of May 7, 2017.

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