Latest / Merryn Talks Money / Is China Reversing Its ‘Uninvestable’ Image?

Transcript

Is China Reversing Its ‘Uninvestable’ Image? · Merryn Talks Money

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merren Trogs Money,
0:19
Speaker 1: the podcast in which people who know the markets explain
0:22
Speaker 1: the markets. I'm Maren Sum's that Web. This week I'm
0:24
Speaker 1: speaking with Dale Nichols, portfolio manager of the Fidelity China
0:27
Speaker 1: Special Situations Trust. As we have discussed many times this
0:31
Speaker 1: year already on this show, the spell around American exceptionalism
0:34
Speaker 1: appears to have broken. Investors are looking elsewhere for places
0:38
Speaker 1: to park their money, and one of those places looks
0:40
Speaker 1: like China. So we thought it'd be a good idea
0:42
Speaker 1: to get on a China expert, which Dale is, get
0:45
Speaker 1: his insights on what he's saying on the ground, see
0:47
Speaker 1: what he makes for the various policy measures in place,
0:49
Speaker 1: think tariffs, and what companies he thinks have the greatest
0:52
Speaker 1: upside potential. Dale. Welcome to Merren Dorogs Money.
0:55
Speaker 2: Thanks Brian, great to be here.
0:57
Speaker 1: Okay, China is such a big topic as almost impossible
1:00
Speaker 1: to know where to start. I suppose that the first
1:03
Speaker 1: thing says that very few people are really invested in
1:06
Speaker 1: China in any significant way. It's a very small part
1:09
Speaker 1: of the World Index. It's percentage of the World Index
1:13
Speaker 1: in general. Nowhere near matches its share of GDP. So what,
1:17
Speaker 1: we're about twenty percent of global GDP and what three
1:21
Speaker 1: percent of the indices?
1:23
Speaker 2: Yeah around there.
1:24
Speaker 1: Yeah, So that's a huge mismatch. And most people will
1:27
Speaker 1: look at that and say, well, that makes a lot
1:29
Speaker 1: of sense because China is more or less uninvestable for
1:33
Speaker 1: an institutional investor and retail investors to tear clear of it.
1:38
Speaker 1: And if you look at the news over the last week,
1:40
Speaker 1: you think to yourself, well, that kind of makes sense.
1:43
Speaker 1: So politically, you've got China in the US now really
1:46
Speaker 1: involved in a fairly nasty row over trade, everyone accusing
1:50
Speaker 1: everyone else of violating, seriously violating, said China absolutely violating,
1:54
Speaker 1: totally violating, says Trump. And then you had the US
1:58
Speaker 1: Defense Secretary out the other day saying that China poses
2:00
Speaker 1: is real, that it could be imminent. You look at
2:03
Speaker 1: the polls and you see that, depending on who you
2:05
Speaker 1: listen to, between thirty five and forty percent of Americans
2:08
Speaker 1: class China as an enemy. And so you look at
2:11
Speaker 1: that and you think, well, for starters, given that political background,
2:14
Speaker 1: ignoring everything else, given that political background, when earth would
2:19
Speaker 1: I put money into China. So let's start there. How
2:22
Speaker 1: bad do you see that political conflict moment?
2:26
Speaker 2: Yeah, if we're talking about the political element, I think
2:28
Speaker 2: you're focusing more on the geopolitical side. And there's no
2:33
Speaker 2: question that you know, this friction that we've seen between
2:36
Speaker 2: China and the US is going to be with us
2:39
Speaker 2: for a long time. It's sort of a natural part
2:40
Speaker 2: I think of sort of China's rise. So I think that's,
2:44
Speaker 2: you know, that something we're going to have to have
2:46
Speaker 2: to deal with. I do feel that people have sort
2:48
Speaker 2: of becoming more comfortable with that.
2:51
Speaker 1: So let's just go right back when you say it's
2:52
Speaker 1: a natural part of China's rise, what do you mean
2:55
Speaker 1: that that economic challenge to the US will naturally cause
3:00
Speaker 1: geopligical conflict.
3:02
Speaker 2: Absolutely. What's often missed in a discussion where we talk
3:05
Speaker 2: about China's competitiveness is the element of scale. You know,
3:08
Speaker 2: obviously a huge population, a lot of companies leveraging that
3:11
Speaker 2: domestic population, taking that scale off shore, so the companies
3:15
Speaker 2: are extremely competitive. It's obviously not just scale we're going
3:18
Speaker 2: to talk about china competitiveness. We shouldn't also ignore the
3:21
Speaker 2: fact that companies in China have basically to compound at
3:25
Speaker 2: R and d spend at about twenty percent for the
3:27
Speaker 2: last decade, So I think that's that's a big part
3:30
Speaker 2: of the story. But I do feel that the scale
3:31
Speaker 2: element is often understated. No, we shouldn't be surprised. I
3:36
Speaker 2: think that China is so competitive in evs when they're
3:39
Speaker 2: producing sixty per seventy percent of the world's evs, and
3:42
Speaker 2: obviously the share of the supply chain, you know, more
3:45
Speaker 2: up upstream is even higher. So you know, I think
3:50
Speaker 2: that's that's sort of an important backdrop to keep in mind.
3:55
Speaker 1: Yeah, and we'll come back to all that kind of thing.
3:57
Speaker 1: I just want to keep it for the first bet
3:59
Speaker 1: right heavily high level. Exactly. It does it concern you
4:04
Speaker 1: that the Americans American administration is now talking in clear
4:09
Speaker 1: terms of you know, conflict and threat and enemy and
4:13
Speaker 1: all these words that, added to the endless tariff difficulties
4:20
Speaker 1: make it make it feel like a you know, stim
4:22
Speaker 1: that it has been a non confrontational relationship for the
4:26
Speaker 1: last twenty years, but now it really does feel kind
4:29
Speaker 1: of dirty.
4:30
Speaker 2: Yeah, But I think at the same time, there's a
4:32
Speaker 2: recognition of just how interconnected the systems are. Having scored
4:35
Speaker 2: percent come out and say there's not going to be decoupling.
4:39
Speaker 2: There's a recognition of just how interwoven the economies are.
4:42
Speaker 2: China's producing thirty percent of the world's goods. You know.
4:46
Speaker 2: It's it's you can't just decouple. The impact is too great.
4:52
Speaker 2: So I expect there's going to be friction, There's going
4:54
Speaker 2: to be you know, high level of competition, but I
4:57
Speaker 2: think at the same time as a recognition that both
5:00
Speaker 2: both are going to develop.
5:02
Speaker 1: And where do you see these trade talks ending out?
5:04
Speaker 1: Then where do you think we'll settle?
5:06
Speaker 2: We'll see on how you know, I would expect you know,
5:10
Speaker 2: I would expect you know, you're probably going to see
5:12
Speaker 2: cart levels towards Chine if I had to guess, probably
5:15
Speaker 2: around the thirty percent level, but it'll probably vary. Bisector. Yeah,
5:19
Speaker 2: I wouldn't be surprised if I had. If I was
5:21
Speaker 2: a betting man, i'd I'd say that's probably where you
5:24
Speaker 2: know things end up.
5:26
Speaker 1: You are a betting man.
5:27
Speaker 2: Those fund management is right, right, But I do think
5:30
Speaker 2: it's again it's you know, it's important to keep things
5:33
Speaker 2: in context. First of all, you know, I invest in companies.
5:37
Speaker 2: I'm sort of evaluating things, you know, at the stock level.
5:40
Speaker 2: I do feel, you know, from a market's perspective and
5:43
Speaker 2: as a bottom up sock picker, it often gets overstated.
5:45
Speaker 2: If you look at if you look at US sales
5:48
Speaker 2: as a percentage of total revenues of MSCI China, we're
5:51
Speaker 2: talking at about three percent, So you know, it's not
5:53
Speaker 2: huge exposure in terms of the companies. The domestic market
5:56
Speaker 2: is just it's just you know, so much, so much
5:58
Speaker 2: more important to the company. Obviously, you know, with tariffs,
6:02
Speaker 2: there's going to be a greater economic impact. You know,
6:05
Speaker 2: the export sector is still significant, but I do feel
6:07
Speaker 2: it's often you know, sort of overstated. I think it's
6:10
Speaker 2: also you know, important to keep in mind that you know,
6:12
Speaker 2: Chinese companies have obviously dealt with tariffs before they come
6:16
Speaker 2: through one point zero and the first sort of you know,
6:19
Speaker 2: the tariffs that are implemented, China you know, continued to
6:22
Speaker 2: gain global market share through that. So I think, you know,
6:26
Speaker 2: and again this is a reflected mind discussions with companies
6:29
Speaker 2: as well. The ones that do have exposures to the
6:31
Speaker 2: US are pretty well prepared. And you know, as someone
6:34
Speaker 2: who looks beyond China as an investor as well, if
6:37
Speaker 2: there's a you know, if there's a group of companies
6:39
Speaker 2: that I would sort of rely on for adaptability, resilience,
6:42
Speaker 2: et cetera, would probably be the Chinese group of companies
6:45
Speaker 2: to come through this. Another thing that you know is
6:48
Speaker 2: I think perhaps underappreciated and a lot of sectors, the
6:52
Speaker 2: whole supply chain is is is Chinese is Chinese companies.
6:56
Speaker 2: So you know, in those cases when we talk to companies,
6:59
Speaker 2: no one worried about market share loss, you know, through terrorists.
7:03
Speaker 2: The discussion all comes down to what happens around price elysicity,
7:07
Speaker 2: What happens to volumes when prices go up thirty forty percent.
7:10
Speaker 2: That's this type of discussion, and obviously, you know there
7:14
Speaker 2: a lot of them are thinking about, you know, if
7:16
Speaker 2: they were to you know, you know, invest in us,
7:19
Speaker 2: what would that involve. And it's a tough decision for
7:21
Speaker 2: them because a lot of a lot of the time
7:23
Speaker 2: there is no supply chain, so they're starting a very
7:26
Speaker 2: low level. It's going to take years, and you know,
7:29
Speaker 2: there's a good chance the political environment might be different
7:32
Speaker 2: by the time that capacity comes online. So that's sort
7:35
Speaker 2: of the that's sort of the you know, the discussions
7:37
Speaker 2: that we're having the companies at the company.
7:39
Speaker 1: Level, and outside that the macro background involving the terriffts,
7:44
Speaker 1: et cetera. The macro situation in China, we read a
7:47
Speaker 1: lot about the dunning, a high debt level, the aging
7:50
Speaker 1: population and income and wealth inequality, property downturn, property downtime
7:54
Speaker 1: being the big one, of course, but all those elements
8:00
Speaker 1: areas a problem, are they for the listed companies in China?
8:05
Speaker 2: Sure? Obviously the economic backdrop is important. Again, I think
8:08
Speaker 2: it's important to keep things in context. You know, we're
8:11
Speaker 2: still talking about five percent growth in a global context.
8:15
Speaker 2: It's not that it's not that bad, and I think
8:18
Speaker 2: it's you know, looking forward, it's fair to assume that,
8:21
Speaker 2: you know, the consumption part of that grows faster. So
8:25
Speaker 2: you know, it's not you know, it's not a it's
8:26
Speaker 2: not a it's not a particularly bad environment. You touched
8:29
Speaker 2: on property, you know, it's definitely been a significant drag
8:33
Speaker 2: for the economy over over the past few years. You know,
8:36
Speaker 2: my senses that where we're definitely past the worst part
8:40
Speaker 2: of that adjustment. I'm particularly focused on, you know, the
8:45
Speaker 2: property market is definitely not going back to the head
8:47
Speaker 2: of years of you know, of huge growth. I'm very
8:51
Speaker 2: focused on what's happening at property prices because I think
8:54
Speaker 2: that's a key factor behind the mindset of the consumer.
8:58
Speaker 2: And you know, the consumer has definitely underspent through COVID.
9:02
Speaker 2: Post COVID, we've had a significant increase in deposits, tumber
9:07
Speaker 2: confidence is low, so you know, I'm very focused on that.
9:10
Speaker 2: But actions have been taken. You know, you need to
9:13
Speaker 2: keep in mind that there was a period of significant
9:15
Speaker 2: property tightening that's mostly unwound now, but there's still there's
9:19
Speaker 2: still you know, things like christ caps and that sort
9:21
Speaker 2: of thing in certain areas. So you've seen significant action
9:24
Speaker 2: to support the property sector, but I expect there's there's
9:28
Speaker 2: definitely more to come. I do feel, you know, particularly
9:30
Speaker 2: from September last year, as a greater recognition amongst policymakers
9:34
Speaker 2: of just what a drag that has been. And we're
9:36
Speaker 2: starting to see signs of stabilization. So, you know, looking
9:40
Speaker 2: at that price element, if you look at first tier
9:42
Speaker 2: cities in I think six of the last eight months,
9:46
Speaker 2: you've had price increases, not the loss, and there's signs
9:49
Speaker 2: of stabilization in the primary market there as well, So
9:52
Speaker 2: you know, I think it's you know, we're sort of
9:55
Speaker 2: on track at some point, but you're on your prices
9:57
Speaker 2: to improve, and once that stabilization continues, you have to
10:00
Speaker 2: think that there's there's more potential for you know, that
10:04
Speaker 2: very sort of low levels of consumption to to start
10:07
Speaker 2: to improve.
10:09
Speaker 1: Okay, so this this is the sorry carry on.
10:11
Speaker 2: And I was just going to finish the point on property.
10:13
Speaker 2: I mean, as I said, that's been a major drag.
10:15
Speaker 2: The peak of the drag is probably this year as well.
10:20
Speaker 2: And again it will still be a drag I expect,
10:22
Speaker 2: but it will be less than it has been has
10:25
Speaker 2: been in the past. So you know, I think it
10:29
Speaker 2: is a pretty good case for things to to slowly improve.
10:33
Speaker 2: And you know, again we get the sense of the
10:35
Speaker 2: government is very much focused on on driving that you know,
10:39
Speaker 2: they're looking at the potential drag that that traffs can
10:41
Speaker 2: be and I think, you know, there's there's you can
10:45
Speaker 2: rest assured that there's going to be there's going to
10:46
Speaker 2: be more coming.
10:47
Speaker 1: Although we have heard, for we do here a year
10:49
Speaker 1: after year after year that the Chinese government is very
10:51
Speaker 1: very focused on shifting the Chinese economy away from being
10:54
Speaker 1: a pure export driven model towards being more of a
10:56
Speaker 1: consumer model, and we do hear this constantly and we
11:00
Speaker 1: don't necessarily see it happening. There's an awful lot of
11:02
Speaker 1: wish for thinking and not necessarily the big macro move
11:06
Speaker 1: that everyone is after.
11:08
Speaker 2: True, I mean, we haven't seen the sort of you know,
11:12
Speaker 2: post COVID stimulus that you've seen in a lot of
11:15
Speaker 2: the West. But you know, again, the sense we have
11:19
Speaker 2: from listening to the policy makers is an increasing awareness
11:22
Speaker 2: of the need to do more, and I think we
11:25
Speaker 2: see we will see more to come. And again I
11:27
Speaker 2: think that property element is important. And the fact that
11:31
Speaker 2: we're seeing things start to say but stabilize, I think
11:34
Speaker 2: is is a good positive sign.
11:37
Speaker 1: Let's talk then a bit about the market. I mean,
11:40
Speaker 1: the long term performance of the Chinese starle market. If
11:43
Speaker 1: you look at MSc China is pretty awful, really and
11:47
Speaker 1: you've had a slightly better year this year, but nonetheless
11:50
Speaker 1: not great. And partly the things that we've been talking about,
11:53
Speaker 1: the macro stuff, but also the fact that you've got
11:56
Speaker 1: a very large section of the market that is state
11:59
Speaker 1: owned enterprises, that you have relatively low margins, that you
12:03
Speaker 1: have a sense that an awful lot of Chinese companies
12:06
Speaker 1: are more focused on market share than profits, that possibly
12:09
Speaker 1: their operations can be more driven by state ambition than
12:14
Speaker 1: by corporate ambition, and those are some of the elements
12:17
Speaker 1: that maybe have led it to underperform and still be
12:20
Speaker 1: remarkably cheap, but cheap relative to global markets. Cheap practice
12:23
Speaker 1: for US, the.
12:25
Speaker 2: State owned portion of the market has has declined. Yeah,
12:29
Speaker 2: so there's been a real market change in the makeup
12:33
Speaker 2: of the market over the past five to ten years.
12:35
Speaker 2: That so proportion has definitely fallen. You know, it's no
12:40
Speaker 2: longer market that is completely dominated by energy, banks and telcos.
12:48
Speaker 2: The private sectors can become a much bigger part of
12:50
Speaker 2: the market but important the biggest driver of the economy
12:53
Speaker 2: as well, the driver of growth, biggest driver of employment, etc.
12:56
Speaker 2: And you know, it's worth noting we've had the creation
12:59
Speaker 2: of of whole new sectors. If you look at what's
13:02
Speaker 2: happened in the auto space with the evs, you know
13:06
Speaker 2: that we've touched on this is obviously mostly driven by
13:10
Speaker 2: by private companies. So that's where the majority of the
13:14
Speaker 2: focus is for us, and we don't ignore the sos,
13:17
Speaker 2: particularly when the obviously evaluation is a is a big factor.
13:21
Speaker 2: So you know, there can be good opportunities we did
13:24
Speaker 2: in the SOS, but gain if we're looking out sort
13:26
Speaker 2: of five to ten years, it's the private companies that
13:28
Speaker 2: are going to be are going to be driving and.
13:31
Speaker 1: Driving the growth, okay, and what might close up? Who's
13:34
Speaker 1: going to come into this market? Who will the buyers be? Now?
13:37
Speaker 1: Are you seeing shift in the institutional mindset? That's the
13:39
Speaker 1: institutional investors are looking at their allocations and saying, well, way,
13:41
Speaker 1: we're exposed to the US. We've got this giant economy
13:43
Speaker 1: over there, We've slightly been alerted to by the teriff argument,
13:46
Speaker 1: and maybe it's time to go above two three percent
13:48
Speaker 1: in China because of course, an awful lot of institution
13:50
Speaker 1: investors and global funds, they are underweight even the index
13:55
Speaker 1: allocation to.
13:55
Speaker 2: China, aren't they absolutely Well, first of all, you know,
13:59
Speaker 2: you would hope it's the domestics, So you know, you
14:04
Speaker 2: have the big domestic institutions that are you know, clearly
14:08
Speaker 2: investing in the market. But you would hope that you know,
14:10
Speaker 2: the individuals you can come back to the market. We've
14:13
Speaker 2: seen an increase in the number of brokerage accounts and
14:16
Speaker 2: that sort of thing last year or so, so hopefully
14:19
Speaker 2: that would be a driver you know, on on the
14:23
Speaker 2: you know, the more international stage. As we've talked about,
14:26
Speaker 2: we're starting from a very low point. I think, you know,
14:29
Speaker 2: sort of commentary out of the US that you know,
14:31
Speaker 2: we're not to coupling. I think there's a recognition that
14:33
Speaker 2: China is investable. If we think about where weights are,
14:37
Speaker 2: you know, there's good potential you know, for that to
14:40
Speaker 2: move up. You know, we talked about that discount relative
14:43
Speaker 2: to the US and what's driven that if you think
14:47
Speaker 2: about things like, you know, policy certainty and things like that.
14:53
Speaker 2: You know, obviously, you know, we've been through a very
14:55
Speaker 2: volatile period in terms of policy, you know, coming out
14:58
Speaker 2: from the US. You know, China is on the fifth
15:02
Speaker 2: year of its fourteen five year plan, so they're pretty
15:06
Speaker 2: you know, there's a fair bit of certainty about you know,
15:08
Speaker 2: so generally where policy is going, you know, over time,
15:12
Speaker 2: if they're not to coupling, hopefully there's a recognition of
15:14
Speaker 2: that stability that can start to bring and what is
15:17
Speaker 2: a pretty still a pretty significant discount back.
15:21
Speaker 1: Yeah, let's talk then about the kind of companies that
15:23
Speaker 1: you're looking for. I mean, if it's obvious to say
15:26
Speaker 1: that the Chinese market should be something of a stock
15:28
Speaker 1: picker's paradise, right, that it's not necessarily a market that
15:32
Speaker 1: the passive investors should go for again, because you might
15:34
Speaker 1: get poked with a whole portfolio full of of sees
15:36
Speaker 1: et cetera. So, if you are an active manager going
15:39
Speaker 1: into this market, do you that, I'm slightly assuming you
15:41
Speaker 1: end up with a bias to med and small cap companies?
15:45
Speaker 1: How do you choose?
15:46
Speaker 2: Where do you look ow do the work? Yeah, yeah, absolutely,
15:49
Speaker 2: I completely agree with you that. You know, it's as
15:52
Speaker 2: a bottom up stock picker, you've got, you know, a
15:55
Speaker 2: huge range of toysture. You've got massive change on the ground,
15:57
Speaker 2: the winners and looters losers are being a being sort
16:00
Speaker 2: of separated all the time as a process of consolidation
16:03
Speaker 2: that's happening. And yet you know, you have this market
16:06
Speaker 2: that's driven by macro headlines, geo political headlines, et cetera.
16:09
Speaker 2: So a little them up stock picker, it's you know,
16:12
Speaker 2: it's very good. You know, we spread the net very
16:14
Speaker 2: wide in terms of what we're looking for, but you know,
16:18
Speaker 2: I do tend to focus on those areas of the
16:20
Speaker 2: economy that we know are going to be bigger parts
16:22
Speaker 2: if you're looking out sort of five to ten years.
16:25
Speaker 2: I talked about, you know, the consumer. I think that
16:28
Speaker 2: particularly just in sort of the mass area, that's it's
16:32
Speaker 2: I think the investment set up is really strong. You know,
16:34
Speaker 2: you've got companies that have been sold over over the
16:37
Speaker 2: concerns the consumer has been weak. But as I've mentioned,
16:40
Speaker 2: we've got a consumer that has underspent for many years.
16:44
Speaker 2: As a result of that, they've got very strong balance
16:46
Speaker 2: sheets and stimulus is coming. And I've trust that with
16:50
Speaker 2: perhaps other markets in the West where you may have
16:53
Speaker 2: a consumer that's more extended and austerity is coming. So
16:56
Speaker 2: I think, you know, the setup for the consumer is
16:59
Speaker 2: is actually quite good. Would you know. I focus on
17:01
Speaker 2: areas like some of the staples areas you look at,
17:05
Speaker 2: you know, you talked about increased competition, the lig an area,
17:07
Speaker 2: like beer, and I think competitive intensity has definitely come
17:11
Speaker 2: down natural premialization. They're getting pricing. They've done a lot
17:15
Speaker 2: in terms of rationalizing factories and things like that, and
17:19
Speaker 2: that capital return story is very live and well. Sports
17:22
Speaker 2: where you've got look at that spend per capita on
17:25
Speaker 2: sportswear in China, it's a fraction of what we see
17:27
Speaker 2: in the West.
17:28
Speaker 1: Well, let me ask you before before you move on
17:30
Speaker 1: to anything else about the luxury goods sector in China,
17:33
Speaker 1: and that one of the things we've been reading about
17:35
Speaker 1: a lot recently, and the decline of interest in Chinese
17:38
Speaker 1: consumer is in the big Western luxury brands and they
17:41
Speaker 1: are shift back to more more of a sense of
17:44
Speaker 1: domestic luxury.
17:45
Speaker 2: You're seeing that, yeah, I mean, if you're talking true luxury,
17:49
Speaker 2: I mean this is a space globally that's dominated by
17:51
Speaker 2: the European. Yeah. So you know, if you were to
17:55
Speaker 2: focus on luxury in China, there's not many ways to
17:58
Speaker 2: play it. I'd say, you know, this strongest luxury brand
18:01
Speaker 2: in China is probably Malti as the top by Jo Brandy.
18:06
Speaker 2: So you know, it's not a it's not a big
18:08
Speaker 2: space if you focus purely on luxury. Obviously there's there's
18:11
Speaker 2: there's some upper market brands, but you know, the real
18:15
Speaker 2: opportunity I think is much more in mass nice market.
18:20
Speaker 1: Okay, And what about the and I suppose when we
18:22
Speaker 1: look at China at the moment, we tend to see innovation,
18:26
Speaker 1: don't we. We see the biggest producers of the evs.
18:29
Speaker 1: We see this extraordinary progress in in AI, the catchy,
18:33
Speaker 1: the unexpected catch up, and we see the huge leadership
18:36
Speaker 1: in solar panels and renewable energy. And also of course
18:39
Speaker 1: they're a much faster shifted to using nuclear energy than
18:43
Speaker 1: the rest of us. So we see this this this
18:45
Speaker 1: ongoing innovation and the whole idea that even a few
18:48
Speaker 1: years ago, people would be writing about how China with
18:51
Speaker 1: China was all very well, but really they're just copying
18:53
Speaker 1: and that story is over stunning innovation in China.
18:57
Speaker 2: Now absolutely true. Yeah, absolutely, it's something that we see daily.
19:01
Speaker 2: I talk about how companies are investing and you're seeing
19:04
Speaker 2: that coming through it just you know, improving competitiveness, which
19:08
Speaker 2: is teating into priss and plow for companies, you know.
19:11
Speaker 2: So yeah, I mean that's definitely a big trend. I
19:13
Speaker 2: have a pretty big, big bet in the trust in industrials,
19:17
Speaker 2: and there's still there's still you know, room for that
19:19
Speaker 2: to play out. If you look at an area like robotics,
19:23
Speaker 2: up until a few years years ago, the top four
19:24
Speaker 2: players were all far you know, the top sort of
19:27
Speaker 2: the big four. Now two of those are now local,
19:31
Speaker 2: but there's still room to make to make share gains.
19:34
Speaker 1: Domestical what are those local what are those local robotics.
19:37
Speaker 2: Companies, companies like Stern and in events. You know, companies
19:41
Speaker 2: that are that are pushing up into into that robotic space.
19:43
Speaker 2: A lot of them, like an Inmates, is doing some
19:45
Speaker 2: of the other components as well. You know, there's definitely
19:48
Speaker 2: room to room to grow there. That whole ev chain
19:52
Speaker 2: that we talked about is very exciting.
19:56
Speaker 1: They've got this great shift to high quality growth. One
20:00
Speaker 1: of the problems that people have felt with that with
20:02
Speaker 1: stock markets over the last four or five years, last decade,
20:06
Speaker 1: maybe is it an awful lot of the growth takes
20:08
Speaker 1: place off market before companies list. Right, So the real growth,
20:12
Speaker 1: the real innovation, the real excitement is in private markets,
20:14
Speaker 1: not public Do you feel that in China as well,
20:18
Speaker 1: that maybe the listed stocks don't necessarily represent the extent
20:23
Speaker 1: of the innovation in the economy. It's hard to get
20:27
Speaker 1: real access.
20:28
Speaker 2: Yeah, no, it's a very fair point that, you know,
20:31
Speaker 2: I mean, globally, companies are coming to market later. You've
20:34
Speaker 2: got some huge private companies. Luckily for us, we're quite
20:38
Speaker 2: active in the private space as well.
20:40
Speaker 1: How it's a the trust of privates, so.
20:43
Speaker 2: It's just over ten percent.
20:45
Speaker 1: What else is in that how do you find those?
20:48
Speaker 1: I mean that's even harder, right, finding finding a good
20:51
Speaker 1: listed stock in thousands of listed companies is hard enough,
20:54
Speaker 1: but going out and looking for private companies on the
20:56
Speaker 1: ground in China, how do you do that?
20:58
Speaker 2: Releverage our public team, So as our public team is
21:04
Speaker 2: you know, sort of obviously focused on you know, the
21:06
Speaker 2: public listeness doocs, but you know they can, you know,
21:09
Speaker 2: they can look at the larger private companies as well.
21:12
Speaker 2: But we have people that are purely focused on private
21:15
Speaker 2: as well, and it's an area that we've expanded out.
21:17
Speaker 2: The majority of potential opportunities that we're finding now is proprietary.
21:23
Speaker 2: So years back were probably more reliant on the banks,
21:26
Speaker 2: but you know, these days, you know, it's very much
21:29
Speaker 2: the proprietary opportunity that we're that we're seeing, you know,
21:32
Speaker 2: by tents we added to you know, in the secondary
21:36
Speaker 2: market last year we think at a single digit type
21:39
Speaker 2: of valuation and that's where the international business losing money.
21:43
Speaker 2: So you know, the TikTok part of the story is
21:45
Speaker 2: actually a drag on earners and very much we feel
21:49
Speaker 2: not factored into into the overall story. And you know,
21:53
Speaker 2: again I feel it's probably another area where the US
21:57
Speaker 2: exposure is somewhat overstated. I mean it's not insignificant. They've
22:02
Speaker 2: got one hundred and seventy million or so users in
22:04
Speaker 2: the US, which is about half of pation. But you
22:07
Speaker 2: know TikTok has have a two billion users.
22:09
Speaker 1: And how do you exit a position like that? I mean,
22:12
Speaker 1: you're hoping that the IPO market will come back and
22:15
Speaker 1: you will be able to exit that in the public markets.
22:19
Speaker 2: Yeah, IPO will be the main form of exit. You know,
22:24
Speaker 2: there could be potential trade sales and that sort of
22:26
Speaker 2: thing in the future, but you know, you've got to
22:28
Speaker 2: assume that that, you know, IPO is going to be
22:31
Speaker 2: the main, you know, the main way to exit these positions.
22:37
Speaker 1: Well, a lot of the things that you've been talking about,
22:40
Speaker 1: it sounds like they might give some hope to those
22:44
Speaker 1: worrying about how countries such as China will cope with
22:47
Speaker 1: their demographic disasters or somedly like them disasters. I mean,
22:51
Speaker 1: China is one of the first places to start think
22:53
Speaker 1: in actual falls in population, right, which is quite a thing.
22:59
Speaker 1: So you see that unfolding, I mean it is extraordinary
23:02
Speaker 1: and that you know, we've never really I was writing
23:04
Speaker 1: the other day about how the world is through effectively
23:07
Speaker 1: peak humanity at the moment, we may already have hit it.
23:10
Speaker 1: Given out how incorrect most forecasts of fertility are, we
23:12
Speaker 1: may already be at peak humanity, which is an extraordinary
23:15
Speaker 1: thing for us for anyway our living and for the
23:17
Speaker 1: first time ever positively topping out of the global population.
23:21
Speaker 1: And you can see it in action in some European countries.
23:23
Speaker 1: You can see it in action in Japan, and you're
23:25
Speaker 1: beginning to see it in action in China.
23:29
Speaker 2: What happens?
23:29
Speaker 1: How does this work? I mean, no one knows that works, right,
23:31
Speaker 1: because we haven't seen it before. But lots of the
23:34
Speaker 1: innovations that you've been discussing feel like they would feed
23:37
Speaker 1: very well into a declining population or certainly a heavily
23:39
Speaker 1: aging and declining population.
23:42
Speaker 2: Yeah, I mean it's a challenge. And as you say,
23:44
Speaker 2: it's not just China. Obviously, Europe, Japan, you know, clearly
23:49
Speaker 2: clearly have these challenges. I don't feel like it's you know,
23:54
Speaker 2: something that sort of you know, really changes the outlook
23:57
Speaker 2: for a lot of stocks. If we're sort of looking
24:00
Speaker 2: out about to ten years, you know, in a big
24:02
Speaker 2: one for a lot of companies, and there are things
24:05
Speaker 2: that China can do obviously, you know, it's the potential,
24:08
Speaker 2: you know, raising of the retirement age. There's still the
24:12
Speaker 2: urbanization story in China. There's still you know, something that's
24:15
Speaker 2: definitely going to play out. You know, you would have
24:17
Speaker 2: heard the potential for things like Houko reform, the household
24:21
Speaker 2: registration reform still got you know, two hundred and eighty
24:25
Speaker 2: million or so workers that aren't afforded the same rights
24:28
Speaker 2: as others. So still a lot of room to you know,
24:31
Speaker 2: address these challenges, and I think that can be you know,
24:34
Speaker 2: definitely supports for consumption as well.
24:38
Speaker 1: One of the things that is really required for a
24:40
Speaker 1: big expansion of the consumer economy, and China is in
24:44
Speaker 1: a bigger welfare state.
24:45
Speaker 2: Right.
24:45
Speaker 1: One of the reasons why it's very hard for being
24:47
Speaker 1: able to spend and feel confident in spending, particularly in
24:50
Speaker 1: a declining population environment, is the lack of a real
24:54
Speaker 1: safety net. So hotly you want to save as much
24:56
Speaker 1: as you can if no one else is going to
24:58
Speaker 1: take care of you. So surely that the the biggest step
25:00
Speaker 1: forward to creating a consumer economy would be the creation
25:03
Speaker 1: of a genuine, more all encompassing welfare state.
25:07
Speaker 2: Yeah, I think all encompassing is the right word. It's
25:09
Speaker 2: it's there, but it needs to be you know, there's
25:12
Speaker 2: room for it to be bolstered. And the things that
25:14
Speaker 2: we've talked about about potential reform in the household registration
25:18
Speaker 2: and that sort of thing, you know, it can be
25:20
Speaker 2: boost to that. And I think you've got to assume
25:22
Speaker 2: that those types of things are on the radar and
25:24
Speaker 2: thinking about you can support the out look of the
25:27
Speaker 2: consumer going forward.
25:28
Speaker 1: Okay, what would make you feel less optimistic about the
25:33
Speaker 1: Chinese market? We've talked about all the reasons to be
25:36
Speaker 1: optimistic about long term returns and the things that are
25:39
Speaker 1: exciting particularly particularly innovation, etc. But what would make you worry?
25:44
Speaker 1: Make you think ically, you know, maybe this is more
25:46
Speaker 1: of a more of a trade and a long term investment,
25:48
Speaker 1: which was is how a lot of people do see.
25:50
Speaker 2: The market, right. I think, you know what would make
25:53
Speaker 2: me more negative? Obviously, you know what happens with property
25:56
Speaker 2: as are set is key, so you know it's sort
25:59
Speaker 2: of aging. Commitment to you know, continue to drive that
26:02
Speaker 2: recovery would be a concern. I think also if we
26:05
Speaker 2: saw you know, a ramp up in domestic regulation, that
26:09
Speaker 2: would be that would be a concern obviously. You know,
26:12
Speaker 2: we went through a period where we did see that
26:15
Speaker 2: you know, pretty pretty significant ramp up in domestic regulation. Uh.
26:19
Speaker 2: You know, we feel we're definitely you know, the focus
26:22
Speaker 2: is much very clearly now on growth. But for whatever
26:27
Speaker 2: reason we saw, i'd say regulation, you know, move strongly
26:31
Speaker 2: in the other direction, that would be definitely be a
26:33
Speaker 2: concern for us.
26:35
Speaker 1: On the flip side, what would make you want to
26:37
Speaker 1: shout from rooftops, everyone get your money and now.
26:40
Speaker 2: It would just be a continuation of a sort of
26:43
Speaker 2: steady recovery. No, I don't think I'd be that bullship.
26:48
Speaker 2: You know, we sort of had you know, sort of
26:49
Speaker 2: huge stimulus you know, infrastructure type packages of the past,
26:54
Speaker 2: but you know, just sort of you know, increasing support
26:57
Speaker 2: for the consumer, gradually roving consumer sentiment. And if we're
27:03
Speaker 2: sort of you know, able to draw on some of
27:05
Speaker 2: those savings and things and things gradually gradually recover, that
27:08
Speaker 2: would be great. Obviously, a more stable global environment mm hmm,
27:13
Speaker 2: that would do it for everybody that would It would
27:16
Speaker 2: be nice to have.
27:18
Speaker 1: Pill tell us this, tell us the story of the
27:20
Speaker 1: most exciting stock you've added recently.
27:23
Speaker 2: I would say it's in my top ten. But if
27:25
Speaker 2: you look at like a company like her Side, you know, Lied,
27:29
Speaker 2: they're extremely competitive in that space. And you know, obviously
27:35
Speaker 2: you know, a very strong like a position in China,
27:37
Speaker 2: but you know, going going off shore making sort of
27:41
Speaker 2: you know big big wins globally as well, and you know,
27:44
Speaker 2: I just it's hard to see how that competitive position,
27:47
Speaker 2: you know, reverses and you know, let's face it, I mean,
27:51
Speaker 2: Autonomous is really just getting going. So we're sort of
27:53
Speaker 2: at the starting point.
27:55
Speaker 1: Last question, then, Belle, what are you reading at the moment?
27:59
Speaker 2: Is not investment related. It's a book called The Line
28:03
Speaker 2: Tracker's Guide to Lives and the author, Boyd Barty, if
28:07
Speaker 2: you've heard him talk, is a fantastic storyteller and they've
28:11
Speaker 2: heard many of his of his stories, but hadn't read
28:15
Speaker 2: the book yet, so I'm sort of working through that.
28:17
Speaker 2: I highly recommend it. There's some great stories and I
28:20
Speaker 2: think probably lessons for life in there as well.
28:23
Speaker 1: Brilliant. Thank you very much and thanks for joining us today.
28:26
Speaker 1: That was fascinating.
28:27
Speaker 2: Thanks Marek, great to chat.
28:34
Speaker 1: Thanks for listening to this week's Marin Talks Money. If
28:37
Speaker 1: you like our show, rate review and subscribe, wherever you
28:39
Speaker 1: listen to podcasts and keep sending questions or comments to
28:42
Speaker 1: Marryn Money at Bloomberg dot net. You can also follow
28:44
Speaker 1: me and John on Twitter or x I'm at marins
28:47
Speaker 1: w and John is John Underscore Stepic. This episode was
28:50
Speaker 1: hosted by Me Maren Sunset Web. It was produced by
28:53
Speaker 1: Someersardian and sound designed by Blake Maple's and special thanks
28:57
Speaker 1: to Dale Nichols