3 themes (and 5 stocks) for long term growth and diversification

This interview was recorded on 16 October 2024.

China’s recovery may have been sluggish following its post-COVID reopening but investors shouldn’t write it off. After all, the second biggest economy in the world still has much to offer, and with a major pivot recently in the form of stimulus, there’s more to come.

John Stavliotis, Portfolio Manager at Antipodes, believes investors in China can benefit from diversification and structural long-term growth. It’s even the largest allocation in his portfolio and he expects this to fluctuate in coming years, even growing higher.

After all, the recent stimulus announcement represents a promising government policy pivot that could spell more for China.

“Since COVID, the excess savings above trend in China’s households equates to US$4 trillion, which is an enormous amount of money that will be put back into the economy should the confidence levels improve with stimulus, for example. 

That’s a big amount of pent-up demand that will drive growth and will drive return on investment,” Stavliotis says.

He is investing across three buckets:

1. Cheap cyclicals exposed to consumers or property with resilient earnings growth.
2. Defensive businesses showing growth and resilience with low valuations.
3. Businesses in areas of structural opportunities.

In this episode of The Pitch, Stavliotis discusses what China’s recently announced stimulus measures mean, the risks and opportunities in China’s outlook and the buckets of exposure he uses. He also shares some of the companies he invests in.

Edited transcript

What impact has the recently announced stimulus package had on the local market and is this a turning point for China?

The policy pivot is the largest pivot since the COVID-19 reopening at the end of 2022. Going into this, investor positioning was very bearish/negative on China, and that's why the MSCI China Index jumped up 36% in two weeks. This is quite extreme and it has started to come off a bit since then. 

The significance has been that a number of ministries have come out with their policies at once, which has not happened in China for quite some time. We've seen a loosening of monetary policy and we've seen statements stating that the property cycle will bottom now and a lot of firepower will be thrown to achieve this. 

There have been statements that the old GFC problem - the local government financing vehicle problem - will be resolved and there's going to be a fiscal announcement imminently that will detail a programme of spending to drive economic growth. So, for us, what does all of this mean?

We've got confidence that a policy pivot has been achieved off a very low base going into this. The policy response to the economy was very weak, so that's quite promising. However, we still have not received the details of how much will be spent and how this will be executed. The risk level remains high on how this will come through for this to become, as you say, a China pivot moment like 2015.

We need to get confidence in the size and the execution and we're watching that very closely in the coming months. The other thing that we would also need to see is some structural announcements and structural improvements. One of those, in particular, would be a return to positive incentives for the population. What I mean by that is giving the population confidence that if they work, if they invest, [and/or] if they're entrepreneurs, they will get paid and will make money from their efforts.

We have seen small structural changes to encourage this, but that's something that we're watching very closely as well.

I'm painting a picture of confidence that there is a policy pivot, but uncertainty remains why this should not be ignored despite the uncertainty since COVID, the excess savings above trend in China's Chinese households equates to 4 trillion US dollars, which is an enormous amount of money that will be put back into the economy should the confidence levels improve with stimulus, for example. So that's a big amount of pent-up demand that will drive growth and will drive return on investment.

What are some of the key risks in the outlook for China that investors should be aware of and how are you managing this in your portfolio?

The first one is obviously we're in a consumer recession and as I've said, the policy outlook is still uncertain. So that cycle risk remains.

Geopolitics has been a risk in China for the last, call it three or four years and that will not go away.

How we're positioned: We are looking at resilient companies, that are showing earnings growth through this challenging period. They've got large cash balances returning capital to shareholders for example. 

So, these companies are well positioned for the down cycle we're seeing and they're very cheap because of that down cycle. That's the opportunity in geopolitics.

We are very cautious of any Chinese company generating revenue in the US effectively zeroing that revenue. And again, we're looking at this as an opportunity. We're investing in companies that are helping with the localisation of software and technology investment in China.

For example, a company we own is called Kingdee (HKG: 0268), which is the SAP or Oracle of China and their enterprise software solutions are now pretty close to what you get from the likes of SAP and they're made specifically for the Chinese companies. They're gaining a lot of share and they're growing very fast even through this environment. So that's an attractive way to turn a risk into an opportunity.

China is the largest allocation in your portfolio at the moment. Do you anticipate that allocation will grow, stay the same or shrink in coming years?

If you look at how it's become the largest allocation, as I've mentioned, we are finding resilient businesses that are growing through this cycle at very cheap valuations, and that's taking into account the cyclical and geopolitical risks as we sit now. 

If I look at, let's say the price target of our holdings or the valuation of our holdings, the way we value these companies implies a multiple that is about half of where these companies used to trade relative to the world. So, we think there's a big margin of safety regardless of those risks.

In terms of how we allocate going forward in this rally, we have taken some profits on some of the winners where the upside has reduced and going forward, we are constantly reassessing our positioning and that's based on the upside and risk that we see in the companies and industries that we research. 

It’s a long answer to your question but in short, that positioning will go up and down given what we see as the upside relative to our broader universe.

What are some of the key opportunities you're seeing in China at the moment and can you share some examples of how you've invested in them?

If you look at how we've invested, it's really in three buckets.

The first one is what I'd call cyclicals exposed to consumer or property that are resiliently growing earnings through this period, but are very cheap and I'll give you a couple of examples. One is Alibaba (HKG: 9988), which most people will know. They are still growing earnings and they've returned 8.5% of their market cap to shareholders through buybacks and dividends in the last year. So that's an attractive business that we're getting paid to weigh.

Another example is KE Holdings (HK: 2423). They're the largest real estate portal in China. Think of them as the realestate.com of China. They're growing through this cycle, growing market share in secondary and new sales. They're also doing a buyback and training very cheap for the growth that they provide.

The second bucket in this environment that we're exposed to is defensives, consumer staples, and other defensive businesses that are again showing growth, resilience, and trading at all times, with low valuations with improving dividends.

An example is China Tower Breweries (HK: 0291), the second largest beer company in China that's benefiting from the premiumisation of beer consumption, which still happens in a weak macro.

The third area, which has been an area that we've been allocating more to in the last year is where we see structural opportunities specifically in areas of decarbonisation, AI, investment software and tech hardware. 

An example there is NARI Technology (SHA: 600406). They are the r&d centre of the grid of China. They manufacture and produce equipment and software technology that helps China decarbonise. Why that's so important, it's not just because of decarbonisation, it's because it's lowering the cost of energy in the country. And that's a key advantage that China has over the rest of the world in manufacturing and other industries.

In short, what's the biggest benefit to investors of holding China and their portfolios?

China has an urban population of over 900 million people. That is a very large single area of demand. At the same time, the economy is at a potential positive inflection point and it's uncorrelated to the US and the rest of the developed world. So, for that reason, I think China has a very appropriate position in portfolios to offer long-term growth and diversification.

Access a portfolio of companies exposed to emerging markets

For more information on the Antipodes Emerging Markets fund, including where John in finding the most attractive opportunities today, please visit the Antipodes website or fund profile below.

Managed Fund

Antipodes Emerging Markets (Managed Fund)

Global Shares

View