While speaking at the Canadian Investment Review’s 2020 Global Investment Conference in September, Catherine Yeung, investment director at Fidelity International, provided an overview of key trends for investors to watch, given the rising prominence of China in global portfolios.
In the wake of the coronavirus crisis, e-commerce usage across the country has accelerated, said Yeung. “One of the interesting things that has emerged from the second quarter reporting season, which just recently came to a close in China, was how e-commerce companies in particular had really grown their earnings. And earnings revisions [are] also looking attractive into the third quarter,” Yeung noted.
Another trend for investors to keep an eye on is the geopolitical tension between China and the U.S. “Now this isn’t anything new,” she said. “The relationship has changed over the past couple of years and regardless of the outcomes of the U.S. elections in November, we continue to see this relationship really morph into more of a competitive one. So the ramifications [of] this really do need to be understood by investors.”
Specifically, the ongoing rivalry between the two countries will likely result in periods of market volatility. And while global markets will react to the outcome of the U.S. election, whoever wins likely won’t change the long-term nature of the relationship.
Yeung explored current issues, including the dispute about WeChat. If WeChat were to be banned in the U.S., it wouldn’t dent the earnings profile of the business because the volume of U.S. users pales in comparison to the total users in China, she noted. “But what we could see is if all of a sudden you can’t advertise as, let’s say, a U.S. brand, like a consumer brand, in China on WeChat or the domestic version of WeChat, then that has big ramifications for the U.S. companies. So this whole kind of discussion about de-globalization has potentially more of an impact on the individual company.”
Another shift for investors to monitor is corporate governance changes in Asia. Particularly in China, significant improvements have been made regarding how companies reward minority shareholders, she said, also noting the rising importance of social factors for Chinese companies.
While working with Chinese companies directly, Yeung said she’s seen a willingness from management teams to want to improve. “It’s almost like this need and desire to want to improve, and to want to have the flexibility, and want to be seen on the global stage as a good place to invest, especially with that sustainable angle . . . It’s not all companies by the way across China and certainly not all companies across Asia, but you are seeing an improvement. I think it’s really refreshing, and I think it’s a really positive move in the right direction.”
Another trend Yeung is observing is that the mainland stock market, or China’s A-shares, has done very well year-to-date. And big pension funds are gravitating to the same kind of A-share names that are included in large global indices.
However, investors must be mindful about portfolio diversification, not just across asset classes, but even within a particular market, Yeung said, noting that having a value tilt as well as owning popular names makes sense as long as this is underpinned by good fundamentals and a margin of safety price-wise.