Andrew Swan
China’s about-turn on its COVID restrictions late last year has had profound impacts on its economy and those of the Asian countries that trade closely with it.
Federal Treasurer Jim Chalmers went so far to say that China’s slowing growth was one of the major economic challenges facing Australia at the start of 2023.
The impacts of COVID in China have been real and terrible for many; however we are optimistic that an open China will ultimately be good for economic growth and we believe the Chinese economy will recover this year. It will be in the coming weeks and months that we will get a much better feel for what that recovery will look like.
Chinese economy
With regard to a Chinese economic recovery, we see the potential for two main options playing out. It will be either a strong, broad recovery or a narrow, shallow recovery.
We at Man GLG are in the slower recovery camp. The argument that the general public has been saving during the pandemic, and therefore has much pent-up demand, is true but most of that household savings has gone into long-term deposits which cannot be immediately spent.
Of those two recovery options, a broad, strong recovery will have global implications through its impact on commodity prices. But even a narrow, shallow recovery will have an impact on global tourism as more people travel.
There is a surge in demand for travel coming. As people have been stranded at home for the past two years, many are now desperate to travel, both domestically and internationally, and forward indictors for all travel are now very strong.
I suspect we’re going to start to see what a post COVID world looks like for China in the second half of February. And it will be a period of time when economic activity picks up for China as economic activity in the West is slowing down.
South Asia
At the same time South Asia is continuing to recover and will benefit from the borders opening up with China as tourism into countries like Singapore, Thailand, Indonesia, and the Philippines, picks up.
Last year many Asian countries, especially in Southeast Asia, acted very independently of what was going on in China and independently of what was going on in developed markets. Many Asian countries actually had a good year when it came to economic growth and returns to equities, which is very unusual in a global downturn.
While there were pockets of strength in South Asia –especially in the smaller economies — now we’re moving into an environment where you have the biggest economy improving, along with smaller economies doing well.
We believe the majority of Asian countries will experience a better economic environment and improving corporate profitability in 2023, which will be good for equities.
Sectors to watch
Given our expectations for a slower recovery, we are looking at companies in the travel, entertainment and restaurant sectors in China, but are very targeted in our investments across all sectors as we do not believe all companies will benefit.
Gaming and tourism
Hong Kong and Macau are likely to be beneficiaries in the first wave of travel, so we like the Macau gaming space. The Macau casinos should do exceptionally well over the next couple of years.
In fact, in December one of the Man GLG Asia Opportunities Fund’s top contributors was Macau casino operator Sands China, which was buoyed by easing restrictions on both the mainland and in Macau. The stock has more than doubled in price since early October when it was granted the renewal of its casino licence.
Countries like Thailand should also benefit from an increase in Chinese tourism, so we have consumption and financials investments in those markets.
Healthcare
We like certain areas of healthcare in China post COVID, as many parts of the sector were deadlocked during COVID and are now in a much better position to grow.
Medical device production and general healthcare should start to improve. In terms of companies to look at, pharmaceutical stock Pharmaron was in the fund’s top five contributors in December as it rallied on growing demand for antipyretics and other anti-viral medication following the steep rise in COVID infections since the start of December.
Automation
Another area of focus in China is automation, which is an industry that has historically been growing above GDP but was heavily impacted by lockdowns. Not only did demand drop, but production capacity during COVID was impacted as well. A return to normal production in 2023 for automation should see corporate profitability improve across the sector.
Insurance
The other area we like is insurance, which has been through some extremely tough times. It should benefit from the restructuring in the sector over the last couple of years as well as the overall economic recovery which will improve the potential to sell insurance products to households.
In December, insurance groups AIA and Ping An were two of the top five contributors to the fund’s outperformance as they also continued their strong run on the back of improving financial conditions and support for the earnings outlook due to China’s reopening.
Looking forward
The next month will be crucial in understanding the economic fate of China, along with that of the rest of Asia, which leans so heavily on it. As the weather warms up in the weeks following Chinese New Year, we should start to get a good sense of whether this is the developed market post COVID model that we should be looking at – i.e. one where consumption booms as consumers use up COVID savings – or whether it’s a China-nuanced recovery.
If it is a broad recovery, then tourism dollars will be flowing around the world, investment will pick up, and that will in turn drive demand for commodities. If supply remains restricted, then it could also be inflationary for the rest of the world. That could cause problems as developed market central banks are still grappling with trying to use monetary policy to bring inflation under control.
Whatever the outcome, there are still good equity opportunities in China, and Asian countries that trade with China, for the astute investor.
By Andrew Swan, portfolio manager
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