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China stands on its own

18 February 2020

Amid the noise of a dwindling trade war, GAM Investments’ Ali Miremadi provides a global perspective on China’s thriving e-commerce market.

During the last decade, the Chinese consumer has replaced infrastructure investment as the driving force of the world’s second largest economy. In our view, it will continue to be one of the largest, fastest growing secular forces in the global economy for the next decade. Such huge secular themes occur infrequently and are not always investable. However, a key principle behind an investment philosophy and process based on deeply fundamental stock picking puts the onus on us to find a suitable investment vehicle to access such opportunities. In other words, a big theme is no good to us without identifying the key companies that are we believe are poised to benefit from it.

China has become an economy driven by internal demand, much more so than international trade, which has confused some people amid all the focus on the ongoing US–China trade dispute. It is reminiscent of the misunderstanding of the Japanese economy during the early 1990s by many international investors, whose familiarity with the largest exporting brands (such as Toyota and Sony) caused them to miss the vital fact that Japan was then, as it is now, a consumption-driven economy. China is, of course, different to Japan in very many ways, and it has transitioned to being a consumption-driven economy much more recently, but the misunderstanding of some international investors remains similar.

A key winner from the Chinese consumer has been its domestic e-commerce sector. Consensus forecasts have Chinese e-commerce growing at an average annual rate of 24% over the next five years, and the number of ‘middle class’ Chinese doubling from 300 million to 600 million.

Chart 1: China is the biggest e-commerce market in the world

Source: eMarketer and Bernstein analysis. For illustrative purposes only.

This has enabled the Chinese ecommerce environment to leave most of the West behind. At 21% of total retail, ecommerce as a percentage in China is at a similar level to the UK and ahead of most of the rest of the world. Yet, within that number are trends that leave the UK well behind. Chinese online grocery shoppers can expect their goods to be delivered within an hour (often half that); a new customer at a Chinese modern store will be integrated into the store’s Wechat messaging network within minutes and most Chinese consumers in tier one cities only pay for goods and services using their mobile phones.

Chart 2: Third party payments including online penetration


Source: iResearch, NBS and Bernstein estimates and analysis. For illustrative purposes only.

As a case in point, one of our team on a research trip to Shenzhen last month met with consternation from the cashier when he tried to buy presents for his children using the anachronistic payment device of a physical credit card.

A clear illustration of how a Chinese e-commerce business has been able to capture the growth of the consumer and direct it towards digitisation is Alibaba. Not only has this company disrupted the retail environment, but it has also embraced financial technology and its Alipay not only has a huge domestic, and increasingly international, market share and is also branching out into offering personal credit, wealth management and insurance products on the back of the payments system.

There is crucially an underlying logic to the web of services Alibaba has chosen to offer – everything conspires to increase the power of the core e-commerce business. While there are a multitude of other businesses in the Chinese e-commerce space, it is our view that Alibaba is a good representative of the potential for these companies. It seems reasonable to expect online transaction volumes to double over the next five years in China, and therefore there continues to be considerable opportunities for domestic e-commerce businesses to thrive ahead of their international peers.

As global investors, we have the privilege to look, compare and contrast all manner of businesses, but it is those businesses that are demonstrating the potential for growth, competitive advantage, strategic vision, strong cash flow and balance sheet that best deserve attention from international investors, in our view.

The recent events in China surrounding the coronavirus may have an immediate negative impact on economic growth, but in our view it will do nothing to change the medium-to-long term trajectory of growing consumer spending. Indeed, in the very short term it may even accelerate the trend from bricks-and-mortar (or wet-market) shopping to an even higher proportion of digital spending.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.