about 3 years ago • 10 mins
Pandemic-induced lockdowns have forced many of us to narrow our horizons. But look up from your kitchen table for a moment and one economy is emerging from the crisis stronger than ever: China.
And that’s creating some exciting opportunities in Chinese stocks. So we wanted to speak to Roddy Snell, a fund manager at the growth-focused money manager Baillie Gifford, to understand where he’s deploying his cash.
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Andrew Rummer: The pandemic has forced governments in Europe and North America to borrow many billions of dollars to support citizens and businesses struggling with lockdowns – in the jargon, they’re “expanding their balance sheets”. China has also taken on more debt, but significantly less than the West. What will that extra debt mean for investors in coming years – as we, hopefully, emerge from this crisis?
Roddy Snell: I think the implications are going to be profound, to be honest. You know, I think we're at an inflection point and it's going to be a very significant divergence between countries that have dealt with the pandemic well – predominantly China – and those that haven't – predominately the developed West – which have destroyed their economies, printed trillions of dollars, and essentially left China as one of the only orthodox central banks left in the world. Who would have thought that 12 to 18 months ago? And that means that, when you look around, you've got trillions of dollars of stimulus in the global economy looking for a home. And you ask yourself, where is it going to go? Is it going to find Western economies most attractive, where they have very limited growth rates, zero to 1% or 2% if you're lucky, zero or negative interest rates that appear to be here to stay for a significant period of time and balance sheets that have massively, massively expanded. Or does it look east towards countries like China where you have decent growth rates, 5% or 6% for China, decent interest rate structures, 2-3% plus, and they haven't expanded their balance sheets? I think it's pretty clearly the latter. And if that's the case that you could see a significant change over the next five to 10 years where money moves away from the US and Europe, heads towards Asia – and China is the biggest beneficiary of that. I think it could be a really significant inflection point in terms of investing over the next decade.
Andrew: So, given all that, what are the most exciting sectors or particular stocks on your radar at the moment?
Roddy: I mean, it's a difficult question because we're finding so many good opportunities actually in China at the moment. So perhaps I'll give you three areas where we're finding a lot of a lot of good opportunities – and a couple of stocks. So the first I'd say would be companies involved in revolutionizing health care. And Ping An Good Doctor would be a good example. This is an online GP service that's utilized artificial intelligence in such a way that a single Ping An doctor can review 500 patients a day with double the accuracy of a physical doctor. You can imagine how useful that might have been in the UK over the past six or seven months. And the second key area would just be the domination of e-commerce: businesses like Alibaba and JD.com, which are sort of the Amazon and eBay of China. They've helped create the world's biggest e-commerce market – larger than the next 10 combined. And these are companies that are still growing 20-30% per year. And the final area that I think is very exciting at this moment is those businesses that are spearheading electric vehicle adoption. So one example would be CATL. This is the world's largest electric vehicle battery maker. And it's already enabled China to account for nearly half the global electric vehicle market and China's got aspirations to go from 5% electric vehicle penetration rate today to 25% over the next five to six years. So a huge growth runway for this business in the EV space.
Andrew: I think it's fair to say you're bullish on China overall. What do you say to those who are more skeptical about the outlook for China? Can it truly make the leap from emerging market to wealthy, developed nation?
Roddy: I think it's a really good question, because the sad truth of most emerging markets is that actually most never emerge. But I think China has and will continue to do so because it's doing everything right. So, first of all, what do you need to actually emerge in the first place? Well, you need an export manufacturing base. You know, it's like Taiwan, Korea, or Japan before it. And China has arguably already built up the greatest export manufacturing base the world's probably ever seen. Now, it's no longer really reliant on exports. It's been able to rebalance the economy and been very successful. It's gone from an investment-led economy to a consumption- and service-led economy, which was crucial for its long-term growth. And that's been done successfully. And now it's focusing on productivity and efficiency, and that's really being driven by R&D and innovation. And China spends more than anyone else in the world now on R&D – and if you go to China today, it makes the UK look very backwards. You know, if you get into Shanghai airport and get the train into town, you'll be whisked off at 270 miles per hour in eight minutes to cover 19 miles. And there's never even a single delay. Even the beggars on the platform will only accept QR code mobile payments. So I think China China has already been incredibly successful. It's doing everything right. It's already the second-largest economy in the world. And I think there's every chance in the next 10 years it becomes the world's largest economy.
Andrew: Given all of your optimism, what does China do badly?
Roddy: Well, it depends what lens you're looking at China through. If you look at it through a sort of Western lens, some might criticize the political structure of the country. It's a single party rule and people don't have a vote. So this is not a democratic country as we know it. Now, the interesting thing at the moment is that, in fact, for some time, certainly since I've been reading the reviews, the Chinese tend to be almost the happiest in the world with their political parties and leaders. And that's Pew Research from the US. So actually, I think as long as the economy is growing and people are successful, the people will remain happy with that system. But I think in the long term, that's probably the biggest tension China is going to have. And I would probably add to that President Xi has accumulated more power than anyone one since Chairman Mao. And there are implications there – in that there are fewer checks and balances, you're more reliant on one person, and that probably means there is greater scope for a policy error going forward.
Andrew: As we record this, we’ve recently had a surprise announcement from Ant Financial that it will postpone its initial public offering, following queries from Chinese regulators. At first glance, it looks like the Chinese authorities are shooting themselves in the foot here after the coup of winning away the world's biggest IPO from the US markets to Chinese markets. What on earth is going on?
Roddy: This was certainly a surprise. As you say, this was going to be the world's largest IPO and was going to come with a market capitalization of around $300 billion. So one of the world's largest companies. It's not clear at the moment exactly what happened. There are a lot of rumors and speculation. What we do know is that senior members of the Ant team met with the regulator of the stock exchange. And due to regulatory changes: in particular, the amount of capital that firms like Ant – fintech firms – would have to hold against loans they made, was going to be increased. And due to these changes, the stock exchange said the IPO was no longer suitable. It does look strange. The timing was certainly awkward. So whether other things have happened, you know, has Ant done something to upset the regulator or the powers that be in the country? But certainly I would agree with your comments that it doesn't seem like the normal course of action, shall we put it that way. That said, you know, the company seems relatively positive that these issues can be resolved quickly. And the IPO could well be happening in the next couple of months.
Andrew: So if I'm a retail investor and I buy into your bullish, rosy vision of the future of China, what's the best way to get involved?
Roddy: I suppose the easiest way is just to buy a China fund. And there are quite a few out there. I don't want to sound too salesy, but Bailllie Gifford is fortunate to have had a China fund for more than 14 years with a great track record. It takes a very long-term view and it's focused on growth. And if you're if you're investing in China, I think you should be looking for growth. That's really the whole point. And that fund's added a lot of value for investors over the years. We've also got an investment trust, which is a closed end fund that's very similar to the China Fund has the advantage of being able to take on gearing. It can invest in smaller-cap companies and it can invest in unlisted companies, which I think will be very attractive to some investors over the coming years. So I would say the easiest way would be to go onto Hargreaves or whatever platform you're using and then look for a suitable China fund.
Andrew: Why would I want to put money into Baillie Gifford or any other kind of actively managed fund rather than just buying an exchange-traded fund that tracks one of the major Chinese stock indexes? I’d have to pay more per year as a management fee for an active fund – so why not just go for the cheaper option?
Roddy: I think the absolute fundamental key reason is that you can make a lot more money in an active fund in China. Now, why is that? It's because China is one of the most inefficient markets in the world. It's incredibly retail driven. Investors move with a real herd-like mentality. The average holding period on the A-Share, the domestic stock market, is less than 50 days. So if you’ve got a differentiated process and philosophy – for example investing on a five to 10 year time horizon – that's a really differentiated edge.
The second reason would be that, don't forget, this is a huge market. And yes, there are some great companies you want to invest in, but there's also a lot you don't want to own. A lot of the companies in the Chinese market are state-owned enterprises, controlled by the state, and they're very poorly managed, they're loss making, and they're not really aligned with shareholders. So if you just go and open an ETF, you're going to be owning a lot of poor businesses. But if you invest in a fund, you get to focus on, say, the best 40 to 80 companies in the country.
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