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Why you need to pay more attention to China’s globalisation push

14 June 2017

Matthews Asia chief investment officer Robert Horrocks outlines how China is placing itself at the centre of global trade.

By Jonathan Jones,

Reporter, FE Trustnet

More investors should be watching China as it positions itself at the centre of global markets with ambitious plans to expand trade, according to Matthews Asia chief investment officer Robert Horrocks.

Some analysts and economists have raised concerns over China’s slowing growth, following the market slump caused by the devaluation of renminbi in 2015. Yet few have commented on its intentions to position itself at the centre of global trade.

Much of the attention on China more recently has been focused on potential trade sanctions from the US following the election of populist Donald Trump as president in November.

However, despite an initial wobble, the MSCI China index is up 17.64 per cent since the Trump election victory, and Horrocks said concerns over trade sanctions have been overblown.

Performance of index over 5yrs


Source: FE Analytics

“I think what brought Trump to power was discontent amongst blue collar workers in places like Michigan, Pennsylvania and Wisconsin,” he said.

“The rhetoric was that this was all due to globalisation but the truth of the matter is probably slightly different.

“Yes, globalisation has played a role but that is much less than the role played by technology and replacing the manual labour with more automated productions processes.

“I think the administration has realised this and if you look at a lot of the rural areas in the states that supported Trump in the election they actually sell a lot of agricultural goods, for example, to NAFTA [North American Free Trade Association countries].”

Horrocks said that if Trump were to attempt a trade war, it would hinder many of his natural supporters in states such as those mentioned above.

He said: “I think it’s just cold hard political calculation on his part that will prevent him from doing anything dramatic.”

However, Horrocks expects a “symbolic gesture” such as the one made by Barack Obama to ban Chinese tyre imports.

“You’ve seen in the past US presidents have always done something on the trade front and banned some import or another. There’s always some symbolic gesture made on trade but I would be very surprised if it went beyond that,” the CIO said.

What investors should be paying more attention to is China expansion to the west, where it is building infrastructure to allow it to trade from its western border as well as its eastern seaboard.

He said this would allow China to better trade with countries in south-east Asia, the Middle East and eventually India and Europe.

Horrocks said: “Global trade depends on transport costs and a big part of transport costs is the quality of the infrastructure. So if China is successful in doing that it does several things for the Chinese economy.

“Firstly it gives an outlet for displaced workers in the north east to move over there and build this infrastructure.

“It also means China is not only exporting out of its eastern seaboard but it is also exporting across land to the west and all of a sudden it becomes the centre of global trade.”

This, he said was backed up by Chinese president Xi Jing Ping who has in recent months talked up the benefits of globalisation publicly.

“When Xi Jing Ping stands up and has his very flowery rhetoric about globalisation it is dangerous to ignore than and dangerous to dismiss that as simple rhetoric,” the CIO said.

“It’s a very deliberate strategic long-term policy because they’ve seen what happens to nations who place themselves at the centre of global trade – they increase their influence politically, they tend to amass a lot of wealth – that is essentially what the Chinese are doing.”

Asia has been a net beneficiary of globalisation, he said, and unlike the western countries, many are keen for the trend to continue.

“What ails the west, or what has given rise to this anti-elite sentiment, has been the fact that the worker has not shared in economic growth recently,” said Horrocks.

“That seems to have accrued to the capitalists and business owners and you see that with high margins and things like share in GDP.

“The stock markets have done very well in the US and earnings [have benefited] even though growth has been quite slow.

“The worker is not feeling that they’ve got their fair share and is protesting against the forces of globalisation and capitalism.”

Indeed, in the US the stock market has risen substantially over the last decade, returning 194.73 per cent to investors and breaking through new record highs.

Performance of index over 10yrs


Source: FE Analytics

However, in Asia this has been the opposite trend – indeed the MSCI AC Asia ex Japan index is up by 142.32 per cent, 52.41 percentage points less than the US.

Horrocks said: “Over the last few years the worker in Asia has done better than the capitalist in terms of sharing the growth.

“The workers share of that GDP has gone up, margins have been squeezed in businesses and you don’t have the same anti-elite sentiment. So in some ways they are very much the mirror image of each other.”

However, the CIO said now that trend in Asia is grinding to a halt and it has hit an equilibrium meaning earnings are improving and companies look more investable.

“Whereas in the past five years what has been noticeable in Asia is they’ve had strong economic growth which has gone to the workers rather than the business, now you are seeing that shared between the two more evenly,” he said.

“That’s why, for the first time this year in four or five years, analysts are not revising down their earnings forecasts anywhere near as much as they have done in the past.

“If I am right about this structural shift then that ought to be something that can be sustained. I suspect you’ve probably got a few big years of relatively robust earnings growth in Asia compared to what we’ve seen in the past.”

He said he is seeing an increasing amount of opportunities among the Chinese ‘A’ shares as a result, and has a 10 per cent overweight to the country in his Matthews Asia Asia Dividend fund.

The $399m fund, which he runs alongside FE Alpha Manger Yu Zhang, has outperformed the MSCI AC Asia Pacific benchmark over the last three years, returning 61.21 per cent to investors.

Performance of fund vs benchmark over 3yrs


Source: FE Analytics

The four crown-rated fund, which has a clean ongoing charges figure (OCF) of 1.33 per cent, and is also overweight South Korea, Thailand and Vietnam.

In an upcoming article, we will look at the countries Horrocks is keen on over a medium-to-long-term timeframe in more detail.

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