One of our clients forwarded us this newsletter authored by our friends in Salt Lake City, Wasatch Advisors. The newsletter describes the Wasatch portfolio managers’ observations from travelling around India and China over the past couple of months. Whilst their bullish observations on India (eg. opportunities in Specialty Chemicals & in manufacturing due to China+1, booming infra investments, surging digital payments, etc), it is the Wasatch duo’s observations on China which are more intriguing.
The Wasatch team says, that contrary to popular belief, the Chinese appear to be in good spirits: “…while it’s true that some reopening data has been below market expectations, we witnessed bustling restaurants, airports and train stations. Tourist attractions were hitting maximum capacity from domestic travelers. People appeared cautious—although most weren’t wearing facemasks—but were generally positive.”
However, Covid has left mental scars which Chinese consumers are finding hard to shake off: “While Chinese consumers are out and about, the loss of freedoms, and often incomes, has made them more cautious about spending. An interesting data point reflects the dichotomy between society reopening and consumers spending less: Domestic travel for China’s May Day holiday break was up 19% from the same holiday before the pandemic, but tourist spending was roughly flat compared to 2019. The lack of discretionary spending is also evident in China’s malls, which seemed relatively empty.
Across China, we noticed “consumption downgrading” by middle-class consumers who appeared hesitant to spend on aspirational items. Overall, we remain optimistic about the reopening trajectory. However, we think progress will be gradual and likely bumpy.”
After describing China’s world class infra and booming tech sector, the Wasatch team summarises their view with guarded optimism: “…there has been and continues to be an abundance of capital available to most Chinese businesses. This has led to fierce competition in some industries and, ultimately, low returns for investors. The abundance of capital means historically productive uses of it may not bear as much fruit. For example, investments in infrastructure and property may have lower marginal returns ahead and be less impactful growth engines going forward. For us, this reinforces the need to dig deep to understand the competitive moats of a business and the industry market structure in order to identify potential winners and losers….
China may be the ultimate stock-picker’s market in that sense, a place where more selective compounders overcome competitive intensity to generate outsized returns. Though the past three years have been a tough environment for compounding earnings because of lockdowns, geopolitical tensions and a volatile macroeconomic backdrop, we remain optimistic that our high-quality, long-duration investment style will be rewarded in China.”
When we at Marcellus meet pension funds and endowments in North America they seem to echo the Wasatch team’s guarded optimism – as opposed to the unbridled enthusiasm we used to see before Covid – regarding China.
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