The trade war could end up being one of the best things to happen to China over the next decade, according to Baillie Gifford Pacific manager Roderick Snell, who says it will reinforce the country’s commitment to becoming the world’s leading economy. 
On 15 January, a preliminary trade deal was signed in which the US halved tariffs on $120bn of Chinese imports, while China agreed to strengthen intellectual property rules and boost US imports by $200bn above 2017 levels. The dispute is far from settled, with full tariffs on $250bn of Chinese goods still in place.
However, rather than hampering China, Snell believes the trade war could work in its favour, jolting it out of any complacency and highlighting the challenges it must overcome to reach its global ambitions.
The manager pointed to a quote from Napoleon who said, “China is a sleeping lion. Let her sleep, for when she wakes, she will shake the world”, before adding: “I think the trade war could be one of the biggest positives for China over the next decade because she has woken up and she has seen the issues and now she is going to double down on her ambitions to be a leading world economy.
“The US has woken the giant and now she is throwing everything she possibly can at making sure that she joins the likes of Korea and Taiwan in becoming a fully emerged economy, leading in various technical areas.
“You can see it all over. Innovation is ramping up, it has just overtaken the EU in R&D [research & development] spending, by 2025 it is going to overtake the EU plus the US. No other country in the world is churning out three million engineering graduates a year. The beast has been woken.”
There are other reasons why the manager is positive on the prospects for China. There have been concerns about the impact of an economic slowdown, with the country’s 6.1 per cent real GDP growth in 2019 the worst figure for 29 years. However, Snell said the clampdown on the shadow banking system means any growth will be more reliable going forward.
“We've had a real reduction in lending across the economy, which is what it needed,” the Baillie Gifford Pacific manager continued.
“This has meant a lot of poor companies have exited and now the companies that are doing well aren't doing things like cheap financing and are actually good companies with good earnings growth.
“And let's not forget, despite this enormous clampdown on liquidity and shadow banking, the economy is actually growing incredibly well, with 8 per cent nominal GDP growth for the second largest economy in the world. Any country in Europe would be crying out for this.”
Speaking more generally, Snell said the drivers behind Asia’s “unparalleled growth story” remain unchanged, with the region likely to add 1.5 to 2 billion people to the global middle class over the next 20 years. He believes the best way to benefit from this trend is through Baillie Gifford’s famed growth investment bias.
However, some of the recent additions to Snell’s portfolio could just as easily be classed as “value” trades, with the manager reducing exposure to technology in favour of more cyclical and “old economy” sectors, such as commodities. He justified this by pointing out that while the world is unlikely to see a repeat of the commodities supercycle of the early part of the 21st century, there are some select materials with powerful tailwinds working in their favour – in particular, nickel.
“The argument here is that if we come anywhere close to the electrification of the auto fleet that people are expecting, nickel will simply not be trading at today's price,” he explained.
“If China gets even halfway to its electric vehicle [EV] ambition, so it gets to 20 per cent over the next five or six years, you're probably going to need about double the current nickel supply in the world today. And that's just not going to happen.
“There's been a lack of supply of high-grade nickel. Over the past decade it has probably grown at about 1 per cent at most, and so we think you could have a very significant squeeze on the nickel price, led by the EV revolution.
“It has been five times this level in the past and it wouldn't surprise me if we got there again.”
The Baillie Gifford manager is playing this through Indonesian company Nickel Mines. Another cyclical opportunity is Brilliance China, a joint venture with BMW for selling cars in China. Snell said an opportunity to buy this stock arose after the country saw its first slowdown in car sales in 30 years.
“This is arguably BMW's best market globally – it is its most profitable and its fastest growing,” he continued.
“However, it is on a cyclically depressed valuation: you can currently buy it on about a 5x P/E [price-to-earnings] multiple, with about two thirds of the market cap likely to be in cash within the next 12 to 18 months. It is almost ridiculously cheap.
“But structurally, it's just a fantastic growth market, especially for the leading brand, BMW. It is just on an incredibly low valuation.”
Data from FE Analytics shows Baillie Gifford Pacific has made 189.44 per cent since Snell took charge in June 2010, compared with gains of 116.76 per cent from the MSCI AC Asia ex Japan index and 109.95 per cent from the IA Asia Pacific ex Japan sector.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
The £630m fund has an ongoing charges figure (OCF) of 0.72 per cent.