TOL - 17th Apr, 2023
How Australian investors can capitalise on the world's largest consumer base
With 1.4 billion residents, China's growing middle class is a hot topic in global investing. But there is an important caveat.
After three years of some of the harshest lockdowns in the world, the Chinese consumer is ready to spend its cash - and Beijing is banking on them to do exactly that. Earlier this month, President Xi Jinping and the Politburo emphasised the importance of getting the population out and spending again.
"We should give priority to the recovery and expansion of consumption. The incomes of urban and rural residents should be boosted through multiple channels. We should stabilise spending on big-ticket items and promote recovery in consumption of consumer services," said Li Keqiang.
But asking the population to spend is one thing. Asking them to do so when consumer confidence is at record lows is a whole other matter. For companies and investors, the proof is yet to be seen in the proverbial pudding.
In this edition of Expert Insights, Catherine Yeung of Fidelity International shares her views on the Chinese consumer. In the video. she emphasises that there are big opportunities with this theme but also admits there is a major caveat to this core thesis.
EDITED TRANSCRIPT
LW: What is the biggest opportunity and biggest challenge about investing in China's middle class?
Yeung: So from a consumption theme perspective, you're absolutely right. Consumption is the key driver of economic growth and again, all the messaging coming out of these big Congress meetings has been directed towards this emphasis on the consumer. Because if you think about it, you don't want to see too much fixed asset investment spending because some parts of China they need to actually deleverage.
Then, China doesn't want to be beholden to global demand given the global environment and the potential risk of a recession. So this is why the consumer story continues to be a key focus in terms of growth going forward. For the consumer, it's all about the ability and the willingness, and Chinese households have the ability. In terms of disposable income or household savings, it's gone from about 31% to 35% so households have a lot of money.
Now, we need to see that willingness emerge because China, just like Hong Kong where I live, we went through some severe lockdowns, so sentiment was very negative. People didn't want to spend.
So if you do have the money to spend, now you need to see that money actually being spent, and recently we saw retail sales for the past two months, so since the pivot towards a reopening, it came in line with expectations so around three and a half percent. But we do expect to see this continuation of stable growth when it comes to spending.
LW: Will consumer confidence remain at record lows for much longer?
Yeung: No. So when we look at the reopening, I mentioned that sheer euphoria that came into the marketplace and the key drivers of the market returns really were the beneficiaries of the reopening itself. So travel related names as an example. Now what we're seeing is a bit of a pullback which is actually healthy. The next stage of the recovery is likely to be more alpha-driven.
In terms of that consumption story, we've got the household wealth which needs to be deployed into consumption in terms of products and services, and then the other key area to monitor very closely is the health of the employment market. And it's not just China, it's globally in terms of employment.
And what we are seeing is that the government has announced the creation of 12 million urban jobs. The employment component of the PMI recently was looking good, so a healthy labour market, this continued urbanisation theme, alleviating poverty, it leads to what we call premiumisation. So consumers at all pricing points, it doesn't have to be luxury.
Take for example, in the lowered cities or the rural parts of China, you can see Yum China, which owns KFC essentially, you'll see a consumer now move from spending three RMB on a traditional Chinese breakfast to spending 10 RMB on a KFC breakfast, and that is premiumisation in itself.
So there are lots of sub-themes under the overarching consumer theme. Premiumisation and the rise of local brands are also looking very interesting so the underlying companies, there's a lot of investment opportunities.
LW: How does all the talk of self-reliance and localisation impact Chinese companies?
Yeung: So don't forget, when we look at this self-sufficiency argument or the risk of geopolitics and growing tensions, especially with the United States, with China, the US, it's really about companies competing to get global market share, and China making no secret that manufacturing-wise, they don't want to be the world's largest toy manufacturer anymore. They want to start going into high-end manufacturing.
I mean, it's actually staggering when you think about how far China's come from a semiconductors manufacturing perspective. Now, the quality of those chips is in no way as sophisticated as let's say, the chips or the chip manufacturers in Korea or in Taiwan but the speed at which China's just ramped up this manufacturing, it's really, really extreme. In terms of China, this self-sufficiency, as an example, by the end of this year, they're going to have 2.9 million 5G towers.
They're constructing something like 600,000 this year alone and these towers run all the apps that we use. They're also trialling now 6G in terms of R&D so they're just really pushing the boundaries in terms of that digitised economy. But the downside here is, again, geopolitically you could see growing tensions, especially if, let's say the US goes into recession and China doesn't, and China keeps on recovering.
But then a lot of people say to us, the correlation between Chinese equities, especially mainland stocks and US equities, is incredibly low. It's one of the lowest and so China, from a diversification perspective in one's portfolio, again, makes a lot of sense.
Managed Fund
Fidelity China Fund
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ETF
Fidelity Global Emerging Markets Fund (Managed Fund) (FEMX)
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
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Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
Hans leads the team's coverage of the global economy and fixed income. He is the creator and moderator of Signal or Noise, Livewire's multimedia series dedicated to top-down investing.
Expertise
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