The Outlook for China


Holly Black: I’m here at the Morningstar Digital Investment Conference with Devan Kaloo. He is Head of Global Emerging Markets at Aberdeen Standard. Hello.

Devan Kaloo: Hi, there.

Black: So, you’ve been talking all things China today. Do you want to tell us some of the key themes for this investment area?

Kaloo: Well, I think there’s a few things and really interesting things. So, first of all, I would say that China as a component of indices is going up, and therefore, there’s going to be positive flows. The second I would say that China is making this transition to domestic consumption or the rise in the middle classes which provides lots of really interesting opportunities. And the third thing I would say is that on the terms of the new economy China is there. There’s lots of really interesting businesses from ecommerce to technology to renewables to potentially invest in. So, there are lots of really positive things going on in China. That though needs to be balanced with the risks and the risks are that there is still the ongoing tension between the U.S. and China. I don’t think that’s going to be going away anytime soon. And of course, valuations are not cheap. Markets have done very well year-to-date and you need to pay up if you want to get access to that. And the last point I’d make is that it’s still true that China is in its infancy with regard to ESG or good corporate governance. So, you need to be quite careful about how you invest in China.

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Black: So, I think just a few months ago, at the start of the outbreak of Covid-19, no one would have predicted that China would have been one of the strongest performing regions of this year. Do you see that continuing or does that strong recovery mean we could be due a sell-off?

Kaloo: Well, I think it sort of depends. I think if we see continued troubled world, then China will probably continue to enjoy a premium or do better in the short to medium term and maybe even long term. I think if we see some relaxation of the US-China tensions, if we see the US perhaps going for big stimulus and potentially weaker dollar as a consequence, then actually I suspect other parts of emerging markets could do quite well. One of the key elements for the other parts of emerging markets to do well though is ultimately the vaccine. So, if a vaccine is developed, then there’s lots of areas which will see significantly stronger growth and therefore as a result potentially better returns.

Black: So, you talk about the new economy in China really leading the way in a lot of sectors. Is that where you’re finding the best investment opportunities?

Kaloo: Yeah. So, I think there’s – investment opportunities are well understood. So, certainly, the ecommerce component of China is well mined, and there’s some very good companies. But I think where there’s some interesting things coming along is around the renewable space, but also around some of the new financial companies are coming through. And here, we’re talking about companies which are eventually fintech. So, there’s a lot of really interesting stuff going there. So, that’s where I would say there’s new ideas coming through. But that said, I would still say we would probably want to maintain some sort of chunky exposure to the ecommerce names that’s well understood like a Tencent, for instance.

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Black: And of course, a big theme is the inclusion of Chinese A-shares in the index. How do you see that affecting investors?

Kaloo: So, I think investors have been historically quite gun-shy of investing in domestic Chinese equities, so equities listed in China and primarily invested in by domestic retail investors. That has started to change. So, overseas investors are getting more comfortable with doing that. But also, what we’re seeing is that increasingly these A-share companies are more receptive to foreign investors and thinking about their responsibilities as shareholders or responsibility to all shareholders. So, I think that we will see continued interest in A-shares, more foreigners getting involved and actually that is one of the most dynamic areas to be investing in emerging markets. It does come with some risks, but certainly the outlook I think is still very good.

Black: Devan, thank you so much for your time.

Kaloo: Thank you.

Black: And thanks for joining us.



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