04 Dec 2020
Mike Shiao, Invesco Asia Equity Investment Team, Invesco
Further information: View the Fund factsheets Invesco China Equity Fund (UK)
China is a land rich in compelling bottom-up investment opportunities. This is based on our expectations that its domestic economy will emerge as a reliable driver of growth while the increasing digitalisation of Chinese society is opening up new markets which some companies are taking advantage of to enhance their product offerings. While selecting stocks, we favour private enterprises which demonstrate entrepreneurship and possess a notable track record in running businesses for their shareholders.
China’s domestic sector has grown significantly and now constitutes a dominant share of GDP. We expect the domestic economy to stage a recovery following the disruption caused by Covid-19 and remain resilient due to several factors.
Firstly, China has imposed strict control measures to contain the outbreak and we believe the government has demonstrated its capability to manage the situation. Secondly, policy support is evident with lending rates and banks’ reserve requirements being cut several times to enhance liquidity. At the same time, the budgetary fiscal deficit has increased and special Covid-19 government bonds will be issued to be used to boost infrastructure spend and employment. As such, domestic sectors such as industrial production and retail sales have been improving since March (figure 1) and we expect them to gather momentum as economic activities normalise further.
Figure 1: Chinese economy is on the path to recovery
Source: NBS, Morgan Stanley Research, as at August 2020.
We have seen US-China tensions moving beyond trade to technology and finance, evidenced by US actions aimed at limiting Huawei‘s (China’s largest telecommunication equipment manufacturer) access to semiconductor technology and a tightening of regulations surrounding US-listed Chinese companies. The Phase 1 trade agreement1 has helped to mitigate tensions somewhat, but we believe they will continue. In particular, we expect geopolitics to be a key risk that investors will closely monitor over the second half of 2020 as the US election approaches.
Given the strength of the domestic economy and continued geopolitical tensions, we have positioned the Invesco China Equity Fund (UK) to capitalise on domestically focused companies, by selecting stocks benefiting from structural growth trends. We believe these stocks offer higher earnings visibility and growth, and will deliver sustained returns for investors.
Our analysts on the ground have noticed a strong increase in consumers’ wealth which is driving up overall spend as well as demand for more high-end products. Since the latter can be sold at higher prices than lower-end products, some companies are improving their product offerings to meet this demand. This has led to our investment in a large tissue producer, a long term holding in the fund.
This company is moving its product mix towards mid- to high end tissues and is doing so, within a growing market. The per capita tissue consumption in China has grown at a CAGR of 8% (2010-2018) versus global growth of 3%2. In particular, non-toilet tissues including facial tissues, as well as higher-end products have experienced rapid demand growth (CAGR of 13%) over the same period. Against this backdrop, the company has focused on facial tissues while continuing to launch higher quality toilet tissue products (figure 2). We believed that the company’s valuation did not fully reflect its potential to deliver double-digit organic sales growth while maintaining a healthy margin, as it continued to position its business to benefit from this strong premiumisation trend.
Figure 2: China’s tissue consumption volume mix
Source: China Household Paper Industry Association, Citi Research, as at October 2019.
To read the full article series on Chinese equities, please visit the Invesco website.
1Phrase 1 trade US-China agreement delayed indefinitely new tariffs on $160bn of Chinese imports and reduced tariffs on $120bn of Chinese imports to 7.5% from 15%.
2 Source: Citi Investment Research as of October 2019.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested. The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk. Although the fund does not actively pursue a concentrated portfolio, it may have a concentrated number of holdings on occasions. Accordingly, the fund may carry a higher degree of risk than a fund which invests in a broader range of companies or takes smaller positions in a relatively large number of holdings. The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
Important information
All data is as at 31/08/2020 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown.
Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.