What it means for investors
- While geopolitical risks remain, particularly around US tariffs on Chinese goods, the marked policy shift demonstrates the Chinese government’s clear commitment to boosting consumption, which is set to drive the country’s long-term development.
- China’s reduced reliance on US exports should help mitigate the economic impact of external challenges.
- A variation in consumption exists across China, demographic shifts and changing spending patterns are helping to reshape a range of industries.
- Stabilising property prices also remain a key factor for unlocking domestic demand and there are some positive signs after the latest policy announcements.
- Technology is helping innovative companies improve their services and consolidate large fragmented markets.
- Significant innovation can be seen in industrials, too, as Chinese firms have achieved scale in advanced manufacturing.
- In healthcare, an increased focus on research and development (R&D) over sales and promotion is driving the development of new drugs and medical devices.
- Healthcare companies are benefiting from this R&D trend by harnessing technology to provide targeted marketing and access to medical information.
- We believe that the fundamentals of corporate China and consumers remain relatively healthy compared to other markets.
Amid elevated volatility, a challenging trading environment and shifting spending patterns, we explore China’s evolving economic landscape, highlighting potential risks and thematic opportunities.
The Chinese consumer will be a key driver of the economy, as the country transitions from an investment and export-driven growth model to one focused on consumption. Indeed, there has been a marked shift in policy support as seen in the recent China’s Government Work Report, indicating the government’s clear desire to address economic weakness and boost spending.
However, investing in China calls for a disciplined approach to identifying opportunities, given that a broad-based market recovery could still take time to unfold.
Yet, risks remain, particularly around US tariffs on Chinese goods. As such, this is an opportunity for China to demonstrate its innovative capabilities and step up its focus on consumers – not only to assist in its negotiations with the US but also to boost the role of domestic consumption within the economy.
A case in point is the introduction of a cost-effective artificial intelligence (AI) model that is altering the dynamics of the technology industry. This originality could also be applied across the consumer segment, and China has consistently demonstrated that it has the tools to make it happen.
More broadly, China’s reduced reliance on US exports, alongside the government’s pivot to domestic demand-led growth and recent fiscal policy measures, should, to some extent, help mitigate the economic impact of these external challenges.
Stabilising property prices also remain a key factor for unlocking domestic demand and there are some positive signs after the latest policy announcements. Physical market data has improved for the last two months, with both new and existing home prices in tier 1 cities improving month over month and declining at a slower year-on-year rate, according to the National Bureau of Statistics.
Technological innovation and evolving consumer behaviour
Aside from advances in AI, other technological developments are helping innovative companies improve their offerings and consolidate large fragmented markets. Businesses are using digital platforms to enhance the customer experience, lower the cost of their services and increase efficiency.
Significant innovation can be seen in industrials, too. Many Chinese firms have achieved scale in advanced manufacturing, supplying critical materials and components to growing industries like renewable energy, electric vehicles and life sciences.
In healthcare, an increased focus on research and development (R&D) over sales and promotion is driving the development of new drugs and medical devices. Some companies are benefiting from this trend by connecting pharmaceutical and medical device companies with doctors through digital platforms, providing targeted marketing and access to medical information, clinical guidelines and diagnostic tools.
We also see a fragmentation in consumer demand between high-quality luxury and value-for-money products. In response, select companies, notably in areas like sports products, are capturing this barbell spending phenomenon by acquiring higher-end foreign brands to help complement the lower-end names in their existing portfolios.
Elsewhere, China has many attractive businesses operating in largely stable segments, such as breweries. The robust brands and healthy market shares of such enterprises provide pricing power and the opportunity for premiumisation. Adaptive companies in other areas like home appliances and white goods manufacturers ‒ some of which are also direct beneficiaries of fiscal support ‒ also look well positioned to gain from a rise in overall consumption levels.
A further development is the growth of experienced-based consumption. For example, the strong intellectual property and longevity of companies offering online or mobile games should continue to provide solid revenue growth.
The demographic shifts and a growing proportion of elderly individuals is reshaping the opportunity set as behaviours and spending patterns change. As a result, we see strong prospects in life insurance, given the low penetration rates across China and other Asia Pacific markets.
Another key factor is firms that can grow their businesses outside of China with the strengths they have established with domestic consumers. When we look at some of China’s neighbouring countries, such as Japan and Korea, experience shows that firms that have survived challenging domestic markets can generally thrive overseas. This could be through exceptional technology, respected brand names or consistent product quality that has helped them generate sustainable and long-term returns for investors.
An eye on growth drivers
China is undoubtedly going through a cyclical downturn, with company profit margins at multi-decade lows. However, we believe that the balance sheets of Chinese consumers are healthy. When there is a positive shift in sentiment and confidence, we believe this huge amount of accumulated savings will likely be unleashed.
China is also the second-largest global economy, with a tremendous entrepreneurial spirit. Over the past few decades, the country has generated vast wealth and created entire supply chains with quality products and high service levels. These companies can meet the demands of Chinese and overseas consumers – at an attractive cost level.
Given these factors, we believe that the fundamentals of corporate China and consumers remain healthy compared to other markets. There have been regulatory headwinds in recent years and concerns over geopolitical risks. However, China has shown its willingness to adjust policy accordingly, and while this introduces increased uncertainty for exporters, it could potentially drive more fiscal policies to support domestic consumption.
Overall, we believe the aggregate earnings growth outlook for corporates exposed to China’s evolving consumer-related growth drivers remains promising and has not yet been reflected in market returns.
