Niall Gallagher, investment director for European equities
Selected European stocks are exposed to a long-term secular growth trend. Some of this structural growth is coming from the expansion in emerging market middle class consumption in areas such as luxury goods, beverages, healthcare and elevators. China in particular is very important in terms of its impact on the world economy – indeed one of our team has recently been visiting companies in Shenzhen. By some estimates 80% of middle class household growth globally over the next few years will come from Asia, with the bulk of that from China.
We are very interested in companies which are exposed to this growing middle class spend by Chinese consumers, and the good news for us is that some of the best exposed global companies are in Europe, such as LVMH, which owns the Louis Vuitton brand as well as Cognac and champagne brands, Richemont, which owns Cartier and other watch brands, and companies like Pernod Ricard. Schindler, the elevator company, is also interesting. Two thirds of the world’s new elevators each year are now installed in China. This growth in middle income households combined with urbanisation, denser cities and the desire for higher quality accommodation are all driving strong, long-term sustainable growth in this area.
Jian Shi Cortesi, portfolio manager for China and Asia equity strategies
Expanding internationally is definitely a long-term ambition for Chinese companies. But in the short term a lot are still focused on the domestic market which is very large and still growing. Chinese companies do not have a lot of expertise in international markets; those in consumer staples and consumer discretionary in particular need strong marketing and branding experience. We have seen healthcare and auto companies trying to branch out into overseas markets. Another strategy has been eyeing European or US companies as a way to own companies with higher technical capabilities – an example of this is auto group Zhejiang Geely buying Volvo.
Overall Chinese consumers are becoming the driving force for economic growth, particularly in sectors such as beauty, fashion, travel, entertainment and automobiles. There are currently over 400 million millennials in China. Since the first of them were born in the eighties they have seen China’s GDP grow more than 20 fold, so they are confident and bullish. They spend a lot more compared to their parents’ generation and we see different spending patterns – they pay more for quality brands which offer uniqueness and specifically for things like cute packaging and funny brand names, although a lot of family-orientated marketing also works with them.
Larry Hatheway, group head of investment solutions and chief economist
As the world’s second largest economy (by some measures soon to become the largest economy) China’s emergence has had an impact on many sectors, above all commodity prices. Its rapid growth, high energy per unit of GDP requirements and rapid urbanisation have kept energy and industrial metals prices well supported. Shifting perceptions about Chinese growth have therefore increased the volatility of those same commodities. By extension, Chinese demand for commodities has boosted the fortunes of ‘commodity’ currencies, such as the Australian dollar, New Zealand dollar or Chilean peso.
In the years immediately following the global financial crisis (GFC) China’s contribution to global GDP growth increased markedly, making China a key barometer for ‘risk-on, risk-off’ perceptions, for instance in the summer of 2015 or first quarter of 2016.
During the early 2000s China’s large current account surplus required it to lend heavily to the rest of the world, which took its principal form then of reserve accumulation, disproportionately in US Treasuries. The resulting ‘global savings glut’ kept US and other interest rates below market-clearing levels, contributing to the excesses in the US and European property markets that culminated in the GFC. Although China’s external surplus is much smaller today, investors keenly follow news on how China’s savings may be shifting, with more recent emphasis on foreign direct investment, including private equity investments in advanced economies.
As China reduces restrictions on its capital account, investment opportunities there are opening for foreign investors. However, the opportunity set remains small relative to the size of the economy, and many investors prefer to ‘play China’ via commodities or dual listings such as US American Depositary Receipts (ADRs).
Michael Lai, investment director for Asia Pacific equities
The travel industry is a good illustration of the emerging role of the Chinese millennial and their spending habits. 2018 is China-EU Tourism Year, with the number of nights spent in the EU by tourists from China already having tripled over the last 10 years. Morgan Stanley estimates Chinese outbound travellers could top 400 million by 2020. China’s transition to a higher-income economy will lead to higher mobility and affordability for Chinese citizens to travel abroad, which will be positive for many economies across the world.
Airlines and hotels are obvious beneficiaries of this trend, as well as companies which operate attractions. Luxury goods and duty free players should also continue to benefit from Chinese nationals contributing an estimated 70% of the luxury industry’s current growth. Chinese nationals are the number one buyers of luxury goods products following a dramatic increase in spending over the past two decades.
Daniel Häuselmann, head of Swiss equities
Investments in Swiss equities are able to participate in the long-term growth of the emerging markets, including China, which plays an important role in many companies. Swiss companies are typically very broadly positioned geographically. The Swiss domestic market is very small; therefore companies have to internationalise their business. Most companies are globally positioned and set the course for the emerging markets early on. The majority have a strong position in China, provided their market segment is developed – healthcare companies are a good example.