Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Asia Growth & Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
It is not unusual for China to sit apart from its global peers. Its handling of the COVID-19 pandemic and its aftermath was no exception.
After being the first country to find cases of the nascent virus in humans in early 2020, for almost three years the Chinese government pursued a near-zero COVID policy. Cities were locked down when cases emerged and strict rules were mandated around movement for its citizens, including those entering and leaving the country. Even after it began slowly rolling out a vaccine programme in 2021, the government did not lift many restrictions, putting it at odds with the majority of the world.
All that changed when widespread protests inspired an accelerated reopening in December 2022, which caught most watchers of China, its politics and its markets off-guard.
Investing in a volatile context
For investors in Asia, it also pointed to the challenges of investing in a region renowned (however unfairly) for a volatile macroeconomic context.
Chinese demand was naturally suppressed by the control measures of its government; yet, at the same time several factors pointed to significant pent up spending capacity, that was primed to be unleashed by the reopening. Average savings rose by 4% in the country between the first quarter of 2020 and the third quarter of 2022. An increased flow of trade in and out of the economy should also help ease domestic inflationary pressures from this sudden surge in consumption. These factors combined point to an investable opportunity.
However, these events also illustrate the risks of being driven by macroeconomics when making investment decisions. The Chinese government’s about-face caught most observers off-guard and the path of the reopening itself is still uncertain, although the risk of further lockdowns abates somewhat as time goes on.
Look beyond the macro
The team behind JPMorgan Asia Growth & Income (JAGI) apply a nuanced approach to the region, which goes some way to addressing this dilemma. While they are fundamentally stock pickers, they don’t ignore the macroeconomic context. Rather, they consider it as one of several factors in their assessment of individual stocks. Utilising JPMorgan’s significant resources, including a 30-strong analyst team based in the region, they are able to build a full picture of the environment in which their investee companies operate.
Prior to the reopening of China’s economy (and, indeed, following), JAGI had a neutral outlook on China in the medium term, reflecting both the opportunities and risks inherent in its unpredictable politics. This allowed them to maintain exposure to the kinds of quality businesses, sitting on cheap valuations that they favour, without being overly exposed to China’s long lockdown or those sectors where macro risk remains high.
An example of one such holding is Yum China, a fast-food restaurant company, which was an immediate beneficiary as lunar new year holidays saw people returning to dine-out. Haier Smart Home, a home appliances company, is seen as a longer-term beneficiary as consumers eventually start making big-ticket purchases that they had been putting off for the last few years.
Another investee company with particular consumer exposure is Shenzhou International Group. The group is a vertically-integrated clothing supplier, meaning it manufactures and distributes its products to customers including Nike and Uniqlo.
The company is a long-term holding for JAGI, due in part to its market-leading position within its knitwear specialism, which has driven the investment case. Chinese manufacturing volumes fell significantly during the ongoing COVID lockdown, partly due to the border closure, which impacted supply chains both in to and out of its factories. With borders now reopen, these look set to recover, and Shenzhen International’s domestic operations should benefit from a post-reopening surge in consumption.
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