Let’s face it: if your taxi driver wants to talk about China slowing down, you can be sure it is not a new phenomenon.
In fact, the Chinese Producer Price Index – a measure of wholesale prices – turned negative in June 2012, which was the first sign that the economy was beginning to deflate.
I often hear that the slowdown in China means that the Chinese stock market will inevitably fall along with economic growth.
This, to me, ignores one of the many ways in which China is different – there has never been much of a link between economic growth and stock market returns.
Consider that over the last two decades China was the world’s fastest-growing major economy, but also sported one of the world’s worst-performing stock markets. So, since there was no link when China was growing – why should a relationship suddenly assert itself as China slows?
It could well be that as capital becomes scarcer in a slowing economy, it therefore becomes better allocated and thus aids return on capital for listed companies.
Amidst the gloom enveloping some of the investment themes of yesterday – infrastructure, raw materials etc. – a couple of positive points are worth bearing in mind.
Firstly, Chinese companies continue to increase their share of world exports even with a currency that has strongly appreciated in real terms over the last few years – a testimony to the efficiency of Chinese manufacturing.
Secondly, the Chinese domestic consumption story continues to hold up remarkably well.
The period of overinvestment in China, which catalysed both the economic overheating and the abrupt slowdown that followed, has actually created what we believe to be a perfect e-commerce playing field.
People talk about the potential of India – and, indeed this should become a great country – but it lacks the infrastructure of China and this is likely to hold back its pace of advancement.
Conversely, Beijing residents can desire virtually anything they like from a durable goods perspective and find it within a two-hour radius of their home. E-commerce will, we believe, continue to be the driving force of domestic consumption in China.
What about the stock market itself? Since October 2014, international investors have been able to access the Chinese domestic market through the Hong Kong stock exchange.
This has created an opportunity to access a deep, liquid and heterogeneous pool of equity which is potentially a rich source of very singular investment opportunities.
Moreover, given the recent sell-off, we are seeing a number of companies, with strong cash flows and ‘sensible’ balance sheets, trading at what we believe to be very compelling valuations.
So, I’m positive on the outlook for China. I cannot say with confidence that the broad economy won’t deteriorate further before it gets better, but, as a stock picker, that is of secondary consideration to me.
China is a stock market that is still in its relative infancy, and we believe that the best is yet to come.
Simon Pickard is a portfolio manager at Man GLG.
