Value investing in China
Many value stocks in China are underappreciated and available at a significant discount despite offering higher long-term total returns and earnings potential than growth names. This makes Chinese value stocks an attractive investment opportunity.
What is the investment outlook for Chinese equities in 2024, given the prevailing macro environment (slowing global growth, geopolitical, higher rates)?
Our investment process does not revolve around forecasting the short-term outlook. We try to invest — with a margin of safety — in good businesses run by competent teams. Given the current negative sentiment around China, we are finding quite a few opportunities where we like the business, trust the management team, and can invest below the medium-term intrinsic value of the business.
What do you think could surprise markets in 2024, positively or negatively?
Surprises are generally unforecastable, and we cannot comment on when the global economy or Chinese policies will start to move in our favour. Most important events in the global economy are difficult to predict, and it is impossible to repeatedly turn them into an investing advantage. But with hard work, we can consistently know more about individual companies, regardless of exogenous factors that affect near-term sentiment and price actions.
Within your portfolio, what has worked well in 2023?
2023 was a volatile period for investing in the Chinese equity market. Encouragingly, we have stuck to our simple process of investing in good businesses at reasonable prices with a sufficient margin of safety. We target companies that offer a superior return on capital and are managed by competent teams. This approach allowed us to avoid timing the market and instead build the Fund with a bottom-up approach with our best individual stock ideas. We focused on the businesses and assessed their business models, vulnerabilities and strengths, management competence and intrinsic values. We believe that if we continue to stay disciplined, we will be rewarded in the long term.
What themes, sectors or regions would offer opportunities and potential risks?
During this time of negative sentiment towards China, we found more companies in the region that have good businesses and are available with a good margin of safety. Consequently, we can incrementally add to several long-term structural beneficiaries in the consumer space, such as retail chains of drug sellers bolstered by a gradually ageing population in China or leading domestic players in the underpenetrated dairy and sportswear industries.
We are equally positive about oil and commodities over the medium term, partly driven by production needs in China, but are also expected to continuously enjoy favourable supply-demand dynamics globally, resulting in less capex allocation to oil exploitation.
