Summary List Placement
Western stock markets are trading around record highs, buoyed by news of potential COVID-19 vaccines, but these gains are dwarfed by the triumphs of the Chinese equities market and its sheer range of opportunities for return, according to Roderick Snell, manager of Baillie Gifford’s China Fund.
Snell’s £519.45 million ($690.37 mln) China Fund had a total return of 220.21% over 5 years, compared with total returns of 128.89% from its benchmark MSCI Golden Dragon index in the same time period, according to Bloomberg LP data.
Chinese business activity is back to pre-pandemic levels, the economy is bouncing back, putting the West to shame, he said. As a result, it’s likely “you’re going to see a tsunami of money leaving the US and the West, heading for the East and China looking for superior returns.”
However, the difference isn’t just anecdotal, it’s quantifiable.
The CSI 300 Index, an index of the top 300 companies on the Shanghai stock exchange, has gained almost 39% in the last 12 months, compared with just 15% in the US’ S&P 500, making it the second-best performing benchmark in the world after the Hang Seng tech index, which has gained almost 84%.
COVID is highlighting this divergence with a dramatic inflection point on the global scale, separating companies that coped well with the crisis – which Snell said are mostly in parts of north Asia and China – versus those that didn’t.
“You’re going to see a divergence where you’ve got trillions of dollars in stimulus looking for economic return. Does it look to the West, where balance sheets have been destroyed, we’re printing money, interest rates are going to be zero or negative for many years to come and growth is at zero to 1%?” Snell said.
“Or does it look to the East and China where balance sheets haven’t been expanded, you’ve got sensible interest rates, three, four or 5%, a decent cost of capital and growth in the 5-6% range?”
“I think it’s clearly the latter,” he answered.
Chinese companies account for 18% of total global market capitalization, but they are significantly underowned in global portfolios and represent just 2.5% of total fund allocation, Snell said.
In the past, China’s “bamboo wall” has favored domestic players – that have “stayed on the right side of the state” – and although the government is gradually opening its markets to the foreign competition, the onset of COVID-19 means this process has slowed and those that are currently operating in the country will reap even more benefits, Snell said.
“What would have taken five or 10 years has been compressed into one or two years and that compressed timeframe means there’s going to be far less time for competitors to enter the market and the returns are going to accrue to a smaller number of players,” he said.
“The incumbent tech firms who have done well in this crisis are going to come out much stronger and with less competition,” he added.
Baillie Gifford has been investing in China since 1989, building up decades of experience in the country to hone its investment process for what is a unique market, he said adding that it ultimately boils down to this simple process.
“It’s very long-term, we’re looking to invest in a 5- to 10-year time horizon, which gives you a real edge in the Chinese market which is really retail driven. The average holding period on China A Shares is about 50 days and when you’re investing on a five year time horizon, you really do have a differentiated mindset,” he added.
Secondly, Snell’s fund is strongly biased towards growth stocks.
“If you’re not investing for growth in China, you’re perhaps missing the point,” he said. “We want to be able to double our money from any investment at an absolute minimum of five years, and we want to come mainly through fundamentals, ie revenues and earnings growth. So we’re really looking for our company to grow earnings by 15 to 20% per annum at an absolute minimum.”
Finally, it has become increasingly advantageous to invest in unlisted equity companies.
“Ten or fifteen years ago, it didn’t matter that you couldn’t invest in unlisted companies, now it does – a lot of the best companies are holding back listings,” Snell added.
Snell highlighted these 7 stocks that are likely to perform well as the Chinese markets continue to flourish.
Ping An Good Doctor
Ping An Good Doctor is an online GP service that has utilized artificial intelligence, meaning a single Ping An doctor can review 500 patients a day with double the accuracy of a physical doctor.
“You can imagine how useful that would have been in for the NHS during this crisis,” Snell said adding that “the revolution of healthcare is a very successful long-term trend in China” and the company is well placed to be a winner as the way people interact with doctors starts to transform.
CATL (Contemporary Amperex Technology)
Ticker: SHE: 300750
CATL, China’s anointed “domestic champion” of lithium-ion battery development and manufacturing is of the global leaders in EV battery production, he said.
“CATL, the world’s largest electric vehicle battery maker, has enabled China to account for nearly half global EV market and China currently wants [global] EV penetration to go from about 5% to 25% over the next five to six years,” Snell said, adding that the market could grow “five fold” with Cattle being the leader within that space.
“In the environmental space, there’s a huge push in China for improving the environmental credentials of the country. They [China] want zero carbon by 2060, and they’re pushing to be the world leader in electric vehicles,” he said.
Ticker: NYSE: LU
Lufax, a FinTech competitor to Ant Finance, is an online finance marketplace similar to the UK’s MoneySuperMarket, he said.
After “regulatory changes” which significantly impacted the Ant’s business model, its long-awaited IPO was suspended, he said adding that “the regulator had been concerned for some time about this model, particularly online lending.”
However, Lufax “actually complies with a lot of the regulations that Ant has fallen foul of… so I think it’s very well placed, being ahead of Ant in terms of the regulation, and possibly more onside with the regulator is a very interesting Fintech going forward,” Snell said.
Ticker: NYSE: BEKE
KE Holdings, is an online platform for housing transactions and services, allowing customers to browse properties for sale on the market.
With lots of IPO’s hitting the Chinese public markets this year, KE Holdings is one of the most exciting, Snell said. “KE Holdings… is essentially the Rightmove of China… rapidly transforming the way properties are purchased within the country,” he added.
Ticker: HKG: 9988
Alibaba is a multinational e-commerce company, “which is the eBay of China,” Snell said.
This, alongside the below JD.com, are a “core holding” for Snell, helping create the world’s biggest e-commerce market, larger than the next 10 combined and about three times the size of the US’,” he said.
Despite their size and trajectory, there is still “a very strong runway of growth for these businesses,” he added.
Ticker: HKG: 9618
JD.com, like Alibaba, is one of China’s massive e-commerce giants, acting as the “the Amazon of China,” Snell added.
Ticker: NASDAQ: BILI
Bilibili is a social video sharing platform using animations and comics, “very much focused on the younger generation, you’re sort of 20 to 25 year olds within the country,” Snell said.