China, newly emerging from the pandemic and still caught up with managing geopolitical tensions which are affecting its exports, is focusing more on key domestic growth sectors. “It’s predominantly a focus on tech infrastructure; science, technology, engineering and mathematics [STEM] consulting; and consumer [sectors]. Not so much on property or financial businesses, nor on exports and everything that goes into the global supply chain,” says Robert Horrocks, chief investment officer and portfolio manager at Matthews Asia.
Horrocks notes that the Chinese government’s backing tends to be strong in these sectors, suggesting that investors can consider riding along. Innovation in new technology and software is one area that Horrocks has seen the pendulum of investment swing towards.
For example, electric vehicles (EVs) stand out for their strong government support. In June, the Chinese government announced a CNY520 billion ($96 billion) package of tax breaks over four years for EVs and other green cars in a bid to boost automotive sales growth. The initiative comes after a decade-long EV purchase-subsidy programme which ended last year.
A study by Counterpoint, a global industries research firm, highlights that China’s passenger EV sales grew 87% y-o-y in 2022, with electric cars now accounting for one in four cars sold in China. On a global scale, Chinese EV sales volume takes up nearly 59%. Of the top 10-selling electric car models in China, eight are from domestic manufacturers, with only two from US manufacturer Tesla. The growth of the EV market is further boosted by higher wages, which is clearly good news for consumption and investment, and for the economy as a whole, says Horrocks.
Healthy investments in healthcare
Another sector that has seen tremendous growth in China has been its healthcare industry. Following the Covid-19 pandemic, the Chinese government has further prioritised the country’s healthcare sector.
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President Xi Jinping highlighted his aim of making the Chinese health industry a mainstay of the national economy in his Healthy China 2030 initiative, with a target industry value of CNY16 trillion.
The initiative includes a number of legal and regulatory changes to present new opportunities for foreign companies to register medical products in a historically Chinese-dominated market.
Horrocks opines that particularly in China, some healthcare issues are “not exactly the same” as in developed markets, and consequently “different kinds of therapies” are needed. He continues: “That means these markets are not necessarily attacked by the big multinationals because they know they can make more money treating different kinds of illnesses or different varieties of illnesses. So there is an element of domestic protection in some of these avenues of research.”
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An insight report in 2022 by law firm King & Wood Mallesons found that the most effective way to achieve widespread healthcare product market access in China was through the country’s National Reimbursement Drug List (NRDL), which allows typically stringent market access barriers to be overcome and is hence beneficial to the sector’s growth.
However, foreign companies have typically found it difficult to qualify for the NRDL.
In an effort to address this, Healthy China 2030’s reform of specific NRDL criteria aims to ease the vetting process and encourage foreign opportunities within China’s healthcare sector.
A 2021 report published by GlobalData, a data analytics and consulting company, cites the reform as a key trend in driving the growth of the Chinese pharmaceuticals sector, which is forecast to achieve a CAGR of 12.2% by 2025.
Horrocks also cites “post-Covid trauma" as a catalyst to a shift in Chinese attitude towards prioritising healthcare.
He recalls living in China in the early 2000s, when the healthcare system was not very well developed and many people were wary of falling sick. “They were always very sensitive to catching a cold and they are always going to be a little bit more sensitive. And so with Covid-19, they do feel the trauma more than other people do,” he says.
This prioritisation by both the Chinese government and the public on healthcare fits with Horrocks’ outlook, as the resumption of in-person medical services this year spells a demand for consumption of medical services throughout the nation.
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Furthermore, R&D investment in innovative medical products is also scheduled for a more than 10% average annual increase, and is expected to represent a large proportion of Chinese healthcare companies’ operating revenues by 2025.
Staying pessimistic on property
Recent headlines on China’s economy and market have been that of how the beleaguered property sector is struggling because of heavy debt levels and softening demand.
Horrocks reckons investors should remain wary of this sector for now.
“You had this period from the 1990s to early 2010 where property development was very strong. Now, property developers are incredibly leveraged. There’s a lot of debt among the developers; not property owners, but the developers themselves,” he says.
“The Chinese government wants to move away from this property-based economic model, so you don’t have the same kind of tailwind that you’ve had in the past,” Horrocks adds.
Since the onset of the debt crisis within the industry in mid-2021, the sector has been marked by rising defaults, setting off chain reactions up and down the line such as unpaid contractors and suppliers, uncompleted homes, and of course, unpaid debts and investments going sour. Given the depth and scale of the morass, Horrocks does not see a quick turnaround in this sector and believes that this industry will remain “unattractive” for the next two decades.
Rising interest in Japan
Up till the recent pick-up earlier this year, investing in Japan’s markets had been one posting underperformance for years. Horrocks partly attributes this to the well-known demographic woes of an ageing, and shrinking, population. “In terms of investment, a shrinking population means your chance of earning profits in the future also shrinks, hence a negative return on investment. If you have a return on investment that’s more negative than an interest rate that’s positive, you’re simply not going to invest,” reasons Horrocks.
To combat this, Horrocks highlights that Japan has successfully stimulated spending and inflation, instead of remaining mired in the stagflationary environment that had characterised the country’s economy since its bubble burst in the 1990s.
This February, the country’s headline inflation reached a four-decade high, while core consumer inflation stayed above the Bank of Japan’s target of 2%.
Horrocks’s sentiments on the benefits of inflation have been reflected in the Nikkei index, with the Japanese stock market currently seeing a gain of around 28% compared to the same period last year.
He believes that investors interested in Japan can pay attention to small capital companies, which have received less market coverage at 21.2% when compared to the rest of Asia at 24.5%.
Horrocks sees domestic companies that are improving on their corporate governance standards, those no longer staying conservative by holding on to huge cashpiles generating next to no returns, and those companies that are signalling higher dividend payouts and buybacks, as potential names for investors to look out for.
“There are all sorts of different domestic sectors that you can look at, or also the capital goods companies in Japan that are exposed to overseas markets, whether they be in automation, robotics, or the semiconductor industries, but also in process and operational improvement,” he adds.
Emerging Vietnam and the Asean region
Vietnam, according to Horrocks, is one of the best emerging markets in Asia. He points to the country’s continued strengthening in their value share of machinery and transport equipment in import and export growth as a key driving factor in recognising the market as one with healthy potential, especially when compared to its Southeast Asian peers.
According to a study by GlobalData, exports in electrical machinery and related equipment take up the largest portion in Vietnam’s export basket, with its share having increased to 42.3% in 2021 from 39.5% in 2020. A report by the World Bank in 2021 revealed that exports of goods and services accounted for close to 93% of the country’s GDP.
Beyond this, Horrocks notes that Vietnam boasts strong total factor productivity (TFP) growth, an equation used by economists to measure operational efficiency based on output, and utilised to interpret economic fortunes to an extent. The nation’s TFP sits above the entire Southeast Asian average TFP, even exceeding that of Singapore.
An overview by the World Bank in April has also praised Vietnam for its resilient and growing economy, projecting the country’s economic growth to pick up to 6.5% in 2024, and attributing its progress to subsiding domestic inflation and accelerating recovery of its main export markets.
Concerning the rest of the Asean region, Horrocks’ view on investing in any of the remaining emerging markets is to “find good-quality” banks and consumer companies.
However, he is sceptical, due to “not being convinced” that there is a “direct way” of investing in those areas to any great extent.
He concludes: “The one country that is sort of moving up is Vietnam. That’s the one place that, I would say, seems to be making greater strides than perhaps other parts of the region.”
