How are investors engaging China in the year of the Rabbit?

Video transcript

1. In terms of recovery catalysts for China and Asia, there are three main themes, exiting zero Covid, interest rates and the reversing strength of the US dollar. Please can you share your thoughts and also discuss any potential headwinds?

Last year, China COVID policy was one of the key headwinds for Asia and China, and this year we have the post-COVID recovery in China, so that should have a positive spillover effect in the rest of Asia. And the second thing is interest rate hikes. Last year, many Asian countries were also hiking interest rates while the US was hiking interest rates. This created a headwind for Asian equity, but now a lot of Asian markets are getting close to the end of the hiking cycle, and towards the end of the year we may even start to see some rate cuts. And this is another positive. Finally, the strong US dollar last year really reduced the risk appetite for Asian equity or Asian fixed income. And now as the US dollar weakness starts to set in, that is positive for risk appetite when it comes to Asian equity. But at the same time, many Asian companies tell us that they're concerned about the global demand, particularly if we see slowdown in the US and Europe. So that is a risk factor that we are monitoring very closely.

2. China accounts for 70 percent of global lithium refining worldwide and produces around half of the EV (Electric Vehicle) batteries globally today. Can you talk a little bit about the EV opportunity? How this compares to traditional cars? And how China might revolutionise this space?

Electric vehicles are a key part of China's energy transition and are viewed to help China achieve its carbon neutrality goal. When it comes to automobile production, for many years China was behind in terms of technology compared to European makers as well as the Japanese makers in the combustion engine area. However, with electric vehicles, now the key driving force is the battery. And batteries are an area where China, Korea, and Japan dominates. And the rest of the EV is becoming very electronic driven. So cars are moving from a mechanical product to an electronic product, and that's where China is also very strong, making all kinds of electronics. So today we see cars with two screens in the front, three screens in the back, the car talks to you, you talk to the car. This has really put the Chinese companies at the forefront to be able to compete with global companies or even at an advantage. In the next 10 years, we should start to see Chinese cars going around the world.

3. What is import substitution technology? How is China reacting and compensating for this? And how does this create opportunities for you in your portfolio?

As you point out, China is really creating these parallel industries because the US has started to ban some high tech access for Chinese companies. Today, some of the Chinese companies, even if they want to buy technology or certain high-tech products, they cannot. For example, when the US banned high-end chips to Huawei, Huawei smartphone business went from the number one market share in the world to much, much smaller. Many Chinese companies are therefore looking at their operations and ask, where are we vulnerable? What if the US bans the access to X, Y, Z, how do we access these technologies? How do we run our operations? And as a result, these companies are looking for import substitutions in all the areas within China, specifically those areas that could be vulnerable to import bans. And in this case, it's a very interesting opportunity because the end customers are eager to work with the product maker to ensure that these products can improve and can work. This creates unique opportunities for many areas in technology in China.

4. You run a China only portfolio and an Asia Ex-Japan Portfolio – what’s the difference between the two? Which is better for different types of investors? And please can you give us your thoughts from a risk management perspective?

Normally our clients use these two portfolios differently. Some clients who want to have a specific view on China, they want to express that view through Chinese equity, and will use our China strategy, while other clients prefer to allocate to all of Asia. And in this case, based on the macro picture and our top-down models, we allocate amongst different Asian countries, including India, Korea and Southeast Asian markets. So there is a diversification benefit. Depending on the client's risk appetite, clients can choose Asia, which tends to be a bit less volatile, or they can choose China when they really have a strong view on China.

5. Finally, what is the most compelling theme in your investment portfolio for 2023 How do you intend to manage these exposures?

This year the key theme is post-COVID recovery. One key area would be consumption related areas. When Chinese consumers were asked, what do you want to do the most after COVID reopening, they said eating out, traveling and doing more sports outdoors. So we have exposure, for example, to online travel, to sportswear, and also all the other industries are benefiting from COVID recovery. For example, pharmaceutical companies. Now after the COVID reopening, the drug marketing process will also start to accelerate. And even for network security companies, now they can go out and implement their project. So we really see many of these areas benefiting. But the key theme comes back to post-COVID recovery.

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