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