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The Asset Class: Wenchang Ma · Strictly Business

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
• 0:05
  According to Chinese astrology, horse is confident, agreeable and responsible,
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  although they also tend to dislike being reined in by others.
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  They're fit and intelligent, adoring physical and mental exertion.
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  They're decisive, but also easily swayed and impatient.
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  The Chinese year of the horse starts on February the 17th. This year ends February
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  the 5th, 2027.
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  But we're not here to talk about astrology.
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  We're here to talk about the Chinese economy in the year of the horse.
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  With me is Wen Chang Ma, portfolio manager, China Equity at 91 in Hong Kong.
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  The last year of the horse, I think 2014, Wen Chang, things have changed for the
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  China economy since then.
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  Quite a lot, I think.
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  Yes, absolutely.
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  I think since 12 years ago, the China market has become more mature.
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  The growth drivers in the Chinese economy have become...
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  certainly more diversified.
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  And I think the overall policy framework has become more clearly oriented towards
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  stability,
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  quality and the long-term competitiveness in the overall economy as well.
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  Was that a result of the property situation, which was so well publicised
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  and is still unwinding?
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  I think the property situation is part of the transformation for China to move away
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  from the very heavy CapEx driven.
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  type of business model towards a more sustainable,
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  diversified growth drivers business model.
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  So I think it is part of it, but it's not the entirety of the story.
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  If we look at today's China in terms of the growth drivers, we see that
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  China continues to open up and the export continues to remain very strong.
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  And the Chinese companies are also investing
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  more and more overseas in terms of their capacity to be able to help them to
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  continue to gain market share
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  overseas, especially in the emerging markets categories.
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  And at the same time, you also have innovation becoming a very important
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  driver as well.
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  And we're seeing a diverse range of innovative fruits coming from the Chinese
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  economy, including the information technology space.
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  including AI, robotics, industrial automation, in healthcare,
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  and it continues to lead the renewable energy transition categories as well.
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  So we're basically seeing that the China economy is going through this big
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  transformation and becoming more resilient along the way, moving away from
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  properties.
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  The properties are used to...
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  contribute to almost 30% of the economy.
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  Now it has gone below 20% already, and it's replaced by these other drivers that
• 3:02
  I have talked about.
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  Yes, the other drivers are very interesting.
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  Exports would always be an important part of the China economy, of course, but AI,
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  very important sector everywhere in the world.
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  And there seems to be a fight between prominence when it comes to United States
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  and China.
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  And China is so far ahead when it comes to energy.
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  And that seems to be giving them the edge, or rather, that's the sort of media
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  rhetoric that I hear.
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  Yeah, I think this is definitely a very fluid and very interesting dynamic that
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  has been
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  developing in the AI related industry in China.
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  So this is, you know, one of the
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  most consequential themes shaping the outlook for this year in the Chinese
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  economy and the Chinese equity
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  market as well.
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  And China has a quite comprehensive overall supply chain that can play into
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  that
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  AI-driven growth as well, all the way from the upstream, you know,
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  IC design, IC manufacturing, down to the
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  AI implementations by large internet companies.
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  And most importantly, I think since last year's deep-seek moment,
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  China has been demonstrating its capability of becoming a lower-cost AI
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  player
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  in the global competitive landscape.
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  So that is certainly quite interesting.
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  Chinese companies are still investing quite heavily into AI, but comparing to
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  the U.S.
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  hyperscalers, the level of investment by Chinese companies is still quite small.
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  So the key focus here is how to develop cost-efficient AI applications and
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  to be able to find the right monetization model as early as possible.
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  And at the same time,
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  we see that China's abundant electricity is a very strong competitive advantage for
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  China's
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  AI race.
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  And that is supported by years of advanced development in terms of renewable energy
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  and the
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  investment into the grid network as well.
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  So that is an advantage that I think is quite remarkable for China.
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  Yes.
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  And as you say, it's an evolving fluid situation.
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  I have to talk about energy and I don't want to politicize this chat.
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  But Mr. Trump, president of the United States, says that China just makes the
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  windmills and then exports them.
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  And China doesn't have any renewable energy or not renewable energy of any
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  consequence.
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  That is, of course, wrong, isn't it, Wen Chang?
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  I think it is clearly an area in terms of competition.
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  U.S.
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  leads the most advanced chip design manufacturing that is related to AI.
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  U.S.
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  hyperscalers still lead the CapEx spending globally in the development of AI
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  technology.
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  But China leads in terms of the advantages when it comes to energy.
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  And in fact, if we just look at some of the numbers,
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  the amount of solar installation in China last year was almost equivalent to...
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  all the solar energy installation that the US has ever done.
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  So that just basically speaks about the gap in terms of this energy
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  transition.
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  And for the development of AI, you do need quite strong computational power,
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  but you also need a strong energy supply to be able to support the
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  sustainable increase of your computational power and also on the inferencing side.
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  So that is something that I think both the US side and the China side is trying to
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  raise.
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  So US needs to catch up in terms of its energy supply.
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  And China needs to catch up in terms of its most advanced chip design and chip
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  manufacturing technologies.
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  I want to talk about asset classes now, which asset classes offer value for
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  investors.
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  and as your portfolio manager, China Equity.
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  I want to focus on equities.
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  And you say in a report that you kindly sent me,
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  you say equity valuations in several areas still reflect excessive pessimism.
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  So when there's excessive pessimism, Wenchang, there's obviously opportunity.
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  Yes, absolutely.
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  So if we look at the China economy as measured by earnings
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  revisions, so the China equity market has already gone through over.
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  four years of earnings downward revisions.
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  But if we take the outlook for 2026 and compare the China market to the rest of
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  the major
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  equity markets,
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  where consensus expects the most significant EPS growth is in the China
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  market.
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  So that speaks of an important recovery in terms of the profitability for Chinese
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  companies.
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  And that's expected to be fueled by the growth drivers coming from innovation,
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  coming from consistent strength in the export categories.
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  And it also speaks to less headwind from the areas that were previously more
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  nuanced,
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  such as the property-related industries,
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  as well as the consumer segment that previously had been quite weak.
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  So as those headwinds gradually dissipate,
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  you expect that the company's earnings overall should start to improve.
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  And over the past five years,
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  China has been over-investing into manufacturing capacity and at the same
• 8:54
  time under-consuming.
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  The pricing environment in China's domestic industries has gone quite
• 9:02
  badly.
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  So basically, the Chinese government has launched the anti-involution initiatives
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  since mid of
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  2024, and we have started to see some results in selective industries.
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  And that should also help the profitability in those industries that are
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  benefiting.
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  So overall, I think with earnings starts to stabilize and even improve in certain
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  industries,
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  that paves a way for a continued...
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  strong equity returns going forward.
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  And if we look at a certain industries where valuation has remained quite muted,
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  these are clearly areas that we can look for bottom-up opportunities from.
• 9:47
  What about regulation?
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  You've talked about earnings and you've hinted at regulation, but regulation for
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  overseas investors,
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  is it becoming easier and will it become easier as we go into the year of the horse
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  and also get the results of the
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  upcoming 15th five-year plan, Wencheng?
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  I think for the 15th five-year plan,
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  the overall tone so far has been emphasising on stability and on the
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  quality of growth.
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  It seems that...
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  The government is focusing on the transformation in promoting a healthier
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  growth model in the next five years and also beyond.
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  And if we think about the overall policy environment,
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  it has remained roughly supportive in terms of growth since the past two years.
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  And that's likely going to be the case still for the year of the horse.
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  So we don't expect to see very significant stimulus coming from the government.
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  So their focus is likely going to remain on the reforms that are
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  more structural in the economy.
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  And at the same time, we think that overall regulation will be taken into
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  consideration of the potential
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  impact on entrepreneurship and on employment.
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  Looking forward to next week, you're going to be gratifyingly quiet, I would imagine,
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  after a busy time, Wen Chang.
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  But are you generally optimistic about the year of the horse?
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  I think we are quite constructive in terms of the equity market outlook.
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  Similarly, on the economy side,
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  I think we're seeing a lot of the headwinds that the economy has previously
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  been facing now gradually dissipating,
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  while the growth drivers become more visible and get to recognize by the equity
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  market,
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  which is helped by the earnings growths demonstrated by the listed companies.
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  Valuation is still not that expensive for China equity market,
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  especially considering the large discount comparing to the U.S.
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  market.
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  And also, I think our macro team, I think the outlook on the U.S.
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  dollar from our macro team is also supportive for emerging market asset class
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  in general.
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  And so that dollar cycle should be helpful for Chinese equities.
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  So all in all, we're quite constructive on the outlook for Chinese equities.
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  Very good, Wencheng.
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  Thanks so much for your analysis.
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  Wencheng Ma is a portfolio manager, China Equity at 91 in Hong Kong.
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  And Wencheng, Happy New Year.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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  various contributors.
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  and do not reflect the policy, position, or opinion of any other agency,
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  organization, employer,
• 12:42
  or company associated with StrictlyBusinessPodcast.com.
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  Assumptions made on the analyses are not reflective of the position of any other
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  entity other than the speaker or the author.
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  And since we are critically thinking human beings, these views are always subject to
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  change, revision,
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  and rethinking at any time.
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  Please do not hold us to them in perpetuity.