“Chinese companies are actively investing overseas to go global. This is a significant step for them to transform from exporters to true global players. It’s very similar to what happened to Japanese corporates back in the 90s when trade tensions escalated.”
In this episode, we're hearing about three investment ideas that are exciting Fidelity’s Asia portfolio managers and how they play into the megatrends of artificial intelligence, the energy transition, and shifting supply chains.
Marty Dropkin, Head of Equities, Asia Pacific, is joined by Monica Li, Fidelity International’s Director of Research for China.
With additional contributions from three of the company’s portfolio managers who have recently returned from a research trip in China: Dale Nicholls, Taosha Wang, and Madeleine Kuang.
The energy transition
Two decades of underinvestment has left energy grids unprepared for the recent spike in demand, stemming from the world’s need for clean energy, as well as the rapid expansion of data centres supporting the growth in AI. Yet this remarkable turn of events is quickly turning into an opportunity - for some of the more unremarkable names in the stock market.
“Demand has caught supply off-guard. It's a perfect set-up for those businesses with existing capacity and power equipment, many of which are in China,” says Monica Li, Director of Research, Chinese equities, who is based in Shanghai. “Demand in the US is so high that it’s siphoning supply from the rest of the world. For Chinese industrials, this creates a vacuum for exports into Southeast Asia, Europe, and Africa.”
Large industrial groups from Japan and Korea will also benefit, according to Dale Nicholls, Hong Kong-based equities portfolio manager. “Investors probably haven't focused on [these companies] for many years, but they are clearly having their time as demand picks up.” Investment could take several years to trickle through, and grids don’t get built overnight. With AI and renewables demand expected to stay hot, Dale thinks there’s room for this idea to run.
Artificial intelligence
By now, AI’s ability to disrupt - for good or ill - is clear for all to see. For equity investors, the question now is whether big tech can justify the high valuations fuelled by the AI story. Taosha Wang, multi-asset portfolio manager in Hong Kong, says companies will need to start showing shareholders how their business models can cash in on AI.
“A lot of the [price] action we're seeing is still investment-driven rather than application or commercialisation-driven,” says Taosha. “So far, from a small base, application is the thing that’s stood out for Chinese tech companies, which have a tremendous track record in putting technologies to commercially viable use.”
The impact will be uneven across Asia. Taosha expects automation to lift productivity and therefore GDP in China, which has a large manufacturing base. The impact in India, which could see some of its traditional IT jobs replaced, is harder to gauge. The picture is more straightforward for tech- hardware manufacturing bases such as Taiwan and Korea, which have already benefitted from AI demand.
Supply chains
It’s easy to assume that companies building capacity outside of China to reduce dependence on the country - referred to as ‘China plus one’ supply chains - is bad for China and Chinese companies. But the picture on the ground is a lot more nuanced, according to Madeleine Kuang, Singapore-based equities portfolio manager, who focuses on Asean economies.
“The larger, more competent [Chinese] companies with internal resources have been able to pivot and adapt… some of these companies are spearheading the charge to establish production bases outside of China,” says Madeleine. “Smaller, less resourced [Chinese companies] haven't been able to adapt well, and therefore, unfortunately, we are seeing some industry consolidation.”
There’s no getting away from geopolitical risks on this topic. Tariffs have accelerated this trend in recent years. But as Monica reminds us, it’s the fundamentals that matter in the end. “Of course, it's important in the short term. But in the longer term, geopolitics are just so hard to predict,” she says. “So we cannot lose sight of companies’ competitiveness. That will be the ultimate driver.”
