On-the-Ground Insights

John Lin: Since the COVID zero policy reopening at the end of 2022. After the initial couple of month bounce, China really has been on the same relatively weak recovery pattern for the last 18 months or so. Now, what's really happening is parts of the economy that are property-related are not doing well. Building, construction, new building sales continue to decline. But the other parts of the economy that are not related to the property, whether it's the domestic consumption part of the economy or non-property-related industrial activities, are doing okay. And so what we're seeing today really is an average, relatively two different stories. Property bad, non-property industrial activities, and domestic consumption are relatively okay, if not spectacular. And we see this current situation continue for quite a while.

The new residential housing market has been in decline for three years in a row already. So first thing I think we should point out or note, is that this is not something new. This is not that's something that's just happening and then surprising everyone and catching the rest of the economy off guard. In fact, it's been going on for so long that there are property companies, big ones, that have gone bankrupt, got restructured, and now out of bankruptcy already. We're actually quite a ways into the declining phase of the property sector downturn. At the peak of the market in 2021, the sale of new residential housing was running at about 1.6 billion square metre. That's a lot of houses, a lot of spaces. This year, calendar 2024, that's forecast to decline to about 800 million square metre. That's half of what it was at the peak of the market three years ago. That's probably going to continue the decline at the 20-30% range that we're seeing today. We see very little evidence that new housing sales or building activities are turning around anytime soon. But the upside of this is that the base of the activity is already much smaller. It's already half the size it was three years ago. Even though percentage-wise, it continues to decline, the total impact on the economy is getting smaller and smaller.

No, we don't think there's going to be huge stimulus policy coming out. They didn't do it 12 months ago or six months ago when the economy looks pretty bad. They didn't do it three months ago when the economy looks really bad. Why would they do it today when the economy finally look like they are doing a bit of recovery?  Where we've been able to source a lot of our performance is really in the areas of industrial companies and consumer companies. These industrial, cyclical companies, the machinery makers, the bus makers, the heavy-duty truck engine makers, all have been able to find either growth drivers domestically because of their industry-leading. Essentially, they have good products and a good business model. But perhaps more importantly, they have been able to find export markets in what we call the global south today. But really, there are other parts of the emerging market in Southeast Asia, in Eastern Europe, in Latin America, or maybe in the Middle East, that help drive the growth of some of those companies. That seems to be a strong trend that should continue. Equally, I think in the consumer sector, you can find some opportunities, whether it's food companies, who's products might go up with food prices because things like climate change, we all know or see on the news, things like droughts, floods in certain markets in South Asia or in Latin America. Those weather events are driving up certain agricultural product prices. And with higher prices, some of these food companies in China also make more money.

AI is a hot thematic in China as it is outside of China. And where the opportunities are in China are probably around a set of hardware equipment makers that make parts that go into things like data centres or help computing power, and so things like optic transceivers, etc. Those are things that will probably continue to see very strong growth because the rest of the world is adding capacity for computing power in order to handle the arrival of AI.

Stuart Rae: China still plays a really important role in emerging markets. It's by far the biggest part of the emerging markets universe. About 25% of the benchmark today is China, but that actually understates its true weight because only 20% of the onshore market, the A-Share market, is included in the main index. If you included all of the A-Share market, China is even bigger as a proportion of the total EM universe.

So as we talked about, China is the biggest part of the emerging markets universe. But one of the interesting aspects of emerging markets is there's lots of different stories going on at any one time. So outside of China today, you've got a number of themes. You've got a nearshoring theme where companies are reorganising their supply chains to build facilities in Eastern Europe or Latin America, places like Mexico. In the Middle East, you've got a massive transformation underway in Saudi Arabia, the region benefitting actually from global instability. Then you've got areas like technology, where in Asia, there's a huge growth in AI-related supply chain technology. And you've got a governance improvement programme in places like Korea that's really driving the market. So China is important, but it's not the only story in emerging markets today.

So a lot of people focus on that relationship between China and the US and exports from China to the US. But a lot of the opportunities we're finding with Chinese companies today are exports within emerging markets. So it's China exporting buses and trucks and heavy equipment to all other emerging markets. One example of that is the Middle East. So Saudi Arabia is undergoing a huge development programme called Vision 2030. It involves things like building 50 tourism resorts on the Red Sea. That requires a huge amount of equipment, and a lot of that equipment is coming from China. So what people talk about is the global south. Connections between emerging markets are actually very important for driving growth and very important for Chinese exports today.