Chinese Equities: Investing in Innovation

Charlie Awdry, Portfolio Manager for the Chinese Equities strategy, provides his views on how China’s rapid tech innovation is creating opportunities to invest in the country’s growing companies and industries.

Key Takeaways

  • Chinese companies are harnessing new technologies to improve efficiency and profitability.
  • Internet companies, appliance manufacturers and even the private sector are benefiting from rapid innovation that ties directly into the strength and scale of the Chinese consumer base.
  • While regulatory risk and trade tensions remain key considerations, we believe Chinese equities continue to provide opportunities for growth at a reasonable price.

China is full of companies that are innovating and creating disruption across multiple industries. One of the areas where we believe this disruption is creating the most opportunities for investors to benefit is the technology sector – particularly large, powerful Internet companies that have big viewership, growing advertising and new products.

The greatest challenge for these companies – and risk to investors – is regulatory, given that they are operating in a Communist country where the regulators can change rules and impose wide-ranging regulations on businesses. However, in our view, the level of innovation that is emerging among Chinese companies creates the potential to invest in rapidly growing enterprises and industries at a very reasonable price.

Convenience Stores Go Digital

In China, mom-and-pop businesses like the corner convenience store are benefiting from the digitization capabilities offered by Internet platforms that can link the stores’ inventory management to their systems. Because these platforms have real-time data on what local customers have been purchasing online, they can suggest which products the stores should stock on their shelves, effectively providing data-driven merchandising for them. The shops can also use the platforms’ location-based advertising tools (think text notifications promoting ice cream specials as prospective customers walk by the store during a heatwave) to attract business.

The result of this partnership is that small businesses are seeing improved efficiencies and boosting revenues, creating a massively vibrant sector in China that we can invest in.

Introducing “Smart” Washing Machines

The Internet of Things is taking hold on a global scale, and China is arguably on the leading edge of this trend. One example I find particularly impressive is washing machines, which are more likely than not to be connected to the Internet in China. By harnessing the data generated from this connectivity, Chinese washing machine suppliers know which cycles are being used most often and can then focus their research and development efforts on those areas to make better products. And because there are over a billion consumers in China, these suppliers have tremendous scale.

The Gaming Industry Explodes

As you may recall, last July, a 16-year-old American professional gamer took home $3 million as the top-prize winner of the Fortnite World Cup. The competition, held at Arthur Ashe Stadium in Flushing Meadows, New York, boasted a total prize pool of $30 million.

For those of us who are uninitiated in the e-sports phenomenon, it may seem far-fetched that tens of thousands of people are going to stadiums to watch people play computer games. Now consider the fact that millions of people are going online to watch people playing computer games talking about themselves playing computer games.

There are currently more than 2.5 billion gamers across the world, projected to spend a combined $152 billion on games in 2019. In China alone, the two platforms that distribute e-sports content – both of which are invested in Tencent, the world’s largest gaming company – have 255 million monthly active users.

Keeping U.S.-China Tensions in Perspective

Clearly, there is a lot of turbulence in equity markets stemming from U.S.-China friction. What started as a trade war has morphed into something bigger, where China and the U.S. are now essentially strategic competitors, and the steady news flow around the situation will create dramatic swings in sentiment.

As tensions between the U.S. and China continue to dominate headlines and rile markets, investors may need to take a step back and think about why they considered investing in Chinese equities in the first place. The rise of the consumer and the abundant opportunities for companies to generate superior profit growth through the kind of innovation we’ve described above, for example, are principles that we believe largely remain in place today.