Is now the time to invest in China and emerging markets?
This week we kick off part one of our new video series, ‘investing in emerging markets’. I interviewed June Lui, a portfolio manager and analyst from Polen Capital’s emerging markets growth team. With over two decades of experience in the Chinese industry, June offers insight into the Chinese economy and where it is headed.
In this video, June highlights the structural shift seen in China post its COVID-era. She explains that given the scale of the economy, rapid growth is no longer sustainable. Therefore, China has shifted its focus to higher-quality growth schemes. Meaning, China has begun outsourcing low-end manufacturing to South-east Asian countries and Latin America, and in lieu, has turned its attention toward high-tech production.
June also points out that the economy is seeing some recovery post-COVID thanks to changes in government policy. Many Chinese companies are trading at low price to earnings (P/E) ratios despite strong double-digit earnings growth, so is there an opportunity for investors here?
Listen to the video to find out more.
Transcript:
Roger: Hi. I’m Roger Montgomery, and welcome to this investing in emerging markets video series with June Lui. Based in Hong Kong, June is a portfolio manager and analyst on Poland Capital’s Emerging Markets Growth team. June has more than two decades experience investing in Chinese companies, having worked in London and Hong Kong as an analyst, co portfolio manager, and portfolio manager. And she’s also a CFA (Chartered Financial Analyst), EAAFAS (European Federation of Financial Analysts Societies) certified, and an ESG (Environmental, Social and Governance) analyst, meaning companies would find it very difficult to greenwash her. In this short video series and in the context of investing in emerging markets, June will explain how she and her team approach emerging markets, why now might be the time to invest in them, and particularly China, and will delve beyond the general subjects of growth and valuation. June, welcome and thank you for traveling to Sydney to be with us.
June: Thank you for inviting me.
Roger: So, June, in Australia, we all know the significance of China because they’re our biggest trading partner. But what are the themes that have been driving the economy and the markets over the last twelve months and more recently?
June: China has been in a lot of trouble in the last few years. In the last two years, the economic recovery after the COVID reopening in early 2023 was disappointing. Actually, the economic growth rate has been slow and many companies have struggled.
Roger: So just to interrupt you there, the growth rates that I remember – I remember in the nineties – 12, 15 per cent, 10 per cent. That was always going to be unsustainable, wasn’t it?
June: Exactly. Because of the scale, the size of the economy. Now it is already the second largest economy in the world. So naturally, the growth rate will be slower. But what we expect is the quality of growth would be better.
Roger: As they’re transitioning from that fixed asset investment across to a consumption led economy. How’s that transition going?
June: It is still ongoing. And, apart from consumption, we are also upgrading the manufacturing capacity from labour-intensive, low-end manufacturing to the higher value adding, higher technology driven manufacturing.
Roger: China still dominates that cheaper manufacturing. So, if the country itself is moving to higher value-added manufacturing, where is that cheaper manufacturing going?
June: Well, they have been going to the Southeast Asian countries. For example, Vietnam, Cambodia, and also some of the Latin America markets like Mexico and Brazil.
Roger: And those profits obviously remain in those Chinese businesses that own those manufacturing plants overseas?
June: Yeah, most of the time. They might move some part of the supply chain to other markets and keep the key components in China, but most of the lower end assembly and lower end manufacturing will be in the other markets.
Roger: Understand. Fantastic. So, June, tell me how has the Chinese market performed – in the Hong Kong market as well – over a year and again, more recently?
June: If we take the MSCI China Index as a reference, the index has declined 60 per cent, from the peak in early 2023 to the low point last year. And, in September, we had the policy announcement, which the market received positively. Since then, we have seen some recovery in the market.
Roger: So, let’s talk about that just briefly. Do you think that the positive response or reaction to government stimulus as well as support for the stock market – do you think that’s sustainable?
June: Yeah. Well, if we look at what they announced in the policy – first of all, why this policy announcement is significant in that the policy makers, (the senior leaders) finally recognise the problems in China, and they are happy to acknowledge them – that’s a very good starting point. And then we see that the policy that they have announced shows that they understand the problems, – which is the overcapacity in certain industries and also the lack of domestic demand. Moreover, the shortage of liquidity in the local governments which affected the circulation in the system.
Roger: So, we now have a picture. Perhaps this is the final question for you and then you can take a breath. The final question is clearly after a 60 per cent decline in the stock market, there must be some incredible opportunities opening up with companies growing at double digit rates but on low price to earnings (P/E) ratios. Is that a fair assessment?
June: Indeed. Even after the recent recovery in the market, the price to earnings (P/E) of the MSCI China Index is still talking about ten times only. And for the companies that we own in our portfolio, most of them, they can deliver double digit like 15 per cent to 20 per cent earnings growth in a sustainable way and they are trading at a very attractive valuation.
Roger: Well, I think you and I both know that if you buy and sell a stock on the same price to earnings (P/E) ratio, your internal rate of return (IRR) equals the earnings growth rate of the company on a per share basis. So, these companies are growing at double digit, assuming that sentiment towards the stock market doesn’t get worse and in fact improves, people are going to make double digit rates. That’s your conclusion?
June: Yes, that is the conclusion.
Roger: Fantastic. It’s great, for you to join us. Thank you so much for doing that and thank you for traveling from Hong Kong down to Sydney to see us.
June: Thank you.
Roger: Thanks, June. Alright. Well, there you have it. We’ll see you again for the second part in this video series.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
