17 Nov 2023
Raheel Altaf, Fund Manager
At the start of the year, many analysts predicted a recovery in China could support the global economy. While the recovery has failed to materialise, Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund, believes it may only be the timing of the prediction that was wrong.
Investment strategists started the year expecting a post-Covid economic boom in China. It failed to appear, but could their predictions be about to come true?
The data coming from China this year has been truly disappointing – rising youth unemployment1, underwhelming growth in retail sales2 and manufacturing output3, a slump in exports4 and a real estate crisis. Yet much of this has been self-inflicted – part of a plan by the Chinese government to deflate the property bubble and ensure growth is sustainable.
Ultimately, that should be welcomed. Investors tend to approve of conservative measures by central banks to reduce risk in the economy. They cannot then complain at the inevitable impact on short-term growth.
Worth a second look
But there are positive numbers coming through now. It may be time to revisit those earlier forecasts – the timing may have been wrong, but the analysis could prove to be correct.
Central bankers in developed markets face a serious challenge in their battle against inflation. The impact of high interest rates always takes time to emerge, so knowing when to ease off the brakes is difficult.
By contrast, in China, though growth is low, so is inflation5. That leaves room for stimulus measures from central banks without sending prices spiralling. While you shouldn’t expect the Chinese government to start implementing enormous economic stimulus packages, it does appear to be applying some measures – such as a recent cut in 12-month lending rates6.
We expect more steps like this. With investor expectations so bleak today, even a modest recovery in demand from domestic consumers could lead to a significant uplift in some share prices of Chinese companies.
Standing on its own two feet
There is still the possibility of a recession in the US. In the past, that would have caused serious pain for China, yet now it could happen without derailing the country’s recovery.
China is a lot less dependent on the US today. Through its Belt and Road infrastructure project, it has strengthened relations across Asia, Africa and Latin America. It now exports far more to Asia than to the US. And Asia has been thriving, even without the benefit of a Chinese economy on fire.
The shape of the Chinese economy has changed, too. In the wake of the Global Financial Crisis, China invested heavily in infrastructure and in smaller, less developed cities. That helped its domestic economy to grow and a strong middle class to emerge. It also caused a boom in the price of natural resources and industrial production globally. China became the world’s factory floor, often supplying cheap products and parts.
More recently, while more developed economies such as the US have been investing in infrastructure, China’s focus has been on building its capacity to create higher-value goods and services.
This year it has overtaken Japan as the world’s largest car manufacturer, and in motor shows across Europe its vehicles are attracting attention for their style, quality and competitive pricing. In the first seven months of this year, 189,000 Chinese cars were sold in Europe7. UBS estimates that by 2030, one in five cars sold in Europe could be Chinese. China is leading the world in the production of batteries, too8.
The internationalisation of Chinese brands
This is all part of a growing phenomenon – the internationalisation of Chinese brands, whether it is PDD Holdings, which owns e-commerce sites Temu and Pinduoduo, or TikTok. This development is built not just on exports, but on the continued rise of the Chinese middle class.
Along with the scope for prudent economic stimulus measures, these structural changes make the outlook for China begin to look more attractive. The same could also be said of other less developed countries, known as emerging markets.
We see real opportunities for selective exposure to China and in emerging markets more widely. The numbers support this case. Look around the world and China and emerging markets – alongside the UK – are the standout regions for value9.
For those nervous about investing in China, the fact that the country’s shares are trading at such deep discounts – compared with both their international peers and long-term averages – could mitigate risk.
On some measures, the average valuation of the US index, the S&P 500, is more than twice as expensive as Chinese e-commerce giant Alibaba10. Alibaba has seen its share price nearly halve over the past two years. By comparison, after a sharp tumble in 2022, Amazon has seen its share price shoot up 50% this year11.
Performance of FTSE China vs S&P 500
30 Sep 2020 to 30 Sep 2023
Source: Refinitiv Datastream. Total return, sterling
Priced in pessimism
Investors are assuming China is in deep trouble and struggling to see the upside. The market is pricing in this pessimism. When the mood is bleakest it can be the best time to find bargains.
9 Bloomberg as at 31 August 2023
This is a marketing communication. Before making any final investment decisions, refer to the fund prospectus, available in English, and KIID/KID, available in English and in your local language depending on local country registration, from www.artemisfunds.com or www.fundinfo.com.
All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
Artemis does not provide investment advice on the advantages or suitability of its products and no information provided should be viewed in this way. Artemis only provides information about its own products and services and does not advise investors. Should you be unsure about the suitability of an investment, you should consult a suitably qualified professional adviser.
Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
Emerging markets risk: Compared to more established economies, investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles, less governed standards or from economic or political instability. Under certain market conditions assets may be difficult to sell.
China risk: The fund can invest in China A-shares (shares traded on Chinese stock exchanges in Renminbi). There is a risk that the fund may suffer difficulties or delays in enforcing its rights in these shares, including title and assurance of ownership.
Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
ESG risk: The fund may select, sell or exclude investments based on ESG criteria; this may lead to the fund underperforming the broader market or other funds that do not apply ESG criteria. If sold based on ESG criteria rather than solely on financial considerations, the price obtained might be lower than that which could have been obtained had the sale not been required.
Investment in a fund concerns the acquisition of units/shares in the fund and not in the underlying assets of the fund.
Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.
For information on sustainability-related aspects of a fund, visit www.artemisfunds.com.
The fund is a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic.
Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data.
Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.
Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.