Search results

China made headlines for watering down coal reduction targets during COP26 , but we think the criticism is unfair. The nation’s own targets set by President Xi Jinping last year – for peak emissions before 2030 and carbon neutrality by 2060 – are still ambitious and noteworthy considering China’s faster economic growth compared to developed countries. Much of China’s carbon-intensive activities over the years, especially in manufacturing, had been outsourced from the West. This makes China’s goals more impressive, considering the scale of change the country needs to make while retaining many of its core industries. And more domestic companies are taking steps to reduce emissions, which suggests the direction of travel is positive and still gathering steam.

Firstly, regulations are nothing new — it has always been a part of the investment equation. If we look at Hong Kong or Singapore for example, the government would introduce new regulations on the property market from time to time; and in China, the government has introduced a number of new regulations for banks and insurance companies over the years. In fact, last year the government changed the pricing policy on automobile insurance, affecting quite a few Chinese general insurers. Therefore, regulation risk is always something to consider. Secondly, we believe the Chinese government has indeed changed — in terms of their priorities and focus — over the last three to four years. China was particularly focused on economic growth previously; and by all accounts, China has been a major economic miracle. From poverty, it has become the second-largest economy in the world. However, in recent years under the leadership of President Xi Jinping, the Chinese government has started to focus much more on social stability and equality. Thus, the underlying spirit of the recently announced regulations seems to be targeting wealthy entrepreneurs and conglomerates. The goal is to help improve the lives of workers, for parents to ease their burden with children, and so forth. Then, there is the environmental aspect too, with the Chinese government increasingly focused on pollution and carbon neutrality. From that perspective, it certainly looks like the Chinese government is becoming more socialist than it was before. I think that is the trend and to some extent, investors will need to acknowledge and accept it when investing in China.

Podcast: China, ray of hope and pockets of opportunities

The pandemic has accelerated certain long-term shifts in consumer behaviour, such as using more online orders for everything from clothing to food. The latest battleground appears to be groceries, but the disrupter emerged from a not-so-new technology — WeChat groups. China’s online e-commerce giants such as Meituan and Pinduoduo are now taking market share from the traditional grocers via community group buying (CGB), which began only four years ago and went mainstream during Covid-19. In this form of e-commerce, leaders of WeChat — or other platforms which recently entered the market — collect orders and have the goods delivered the next day to pick-up spots in their members’ communities. In between, the orders are aggregated by the platforms and transmitted to the upstream suppliers which deliver the goods.

Learn about investing in global emerging market equities with FSSA IM. Our GEM funds invest in high quality companies that outperform over the long term.

What will 2021 look like for China? 2021 will be a year of recovery. This is not surprising given last year’s economic downturn. If vaccines are being rolled out gradually during the year, we believe the economy will recover, especially those sectors that have been hit hard like travel. Hong Kong’s travel sector declined by 99.9% last year so there really isn’t much room left to decline.

Learn about investing in the world's fastest growing markets with FSSA Investment Managers. We invest in high quality equities that outperform over the long term.

In our last client update, written through the depths of Covid-despair, we observed that real life and the world of markets are seldom so intimately entwined. With markets swinging violently to the downside on a riptide of fear, it was clear even then that activity was being driven by short-term anxiety rather than a real evaluation of Asia’s longer-term value-accretion prospects.

In almost every meeting that we have with management teams, we will ask about incentivisation. In our view, it is an important question and the answer can be highly revealing about an organisation’s culture and behaviour. While it can be easy to be deceived by articulate CEOs talking up a big game with lots of investor-friendly buzzwords, in our experience what ultimately drives outcomes (at least the ones that management teams can influence) are the incentives. As with most things, striking the right balance is key. If there are no incentives to good performance (and no disincentive for poor performance), companies often end up with capital being systematically mis-allocated without any accountability. This tends to be the case with most State-Owned Enterprises (SOEs), which is one of the reasons we are generally cautious on them. On the other hand, too much of a good thing can also have adverse consequences, which we often see in turbo-charged incentive schemes concentrated among just a few senior executives. While they might lead to exponential growth for a short period of time, the growth is usually not sustainable. After a rapid period of expansion, imbalances are typically built up and when growth inevitably slows it is usually not just one skeleton that falls out of the closet.

Since our last update, global markets have not been short of action and the manic behaviour characterising today’s markets has taken investors on another rollercoaster ride. While not quite comparable to the market movements seen during the dark days of March 2020, the recent correction — especially in China-related companies — has been notable. Yet, from a market perspective, a sense of normality is finally starting to emerge after the more speculative phases over the past 12-18 months. Companies related to the Work- or Consumed-From-Home environment are starting to discount a more realistic outlook and, equally, franchises with good long-term prospects that were experiencing temporary uncertainties caused by the pandemic have, for the most part, regained some of the lost ground as their underlying business fundamentals continue to improve.

In September 2023, I met more than 30 global listed infrastructure companies and stakeholders from the UK, Europe and China. The following travel diary summarises my impressions and findings from these meetings.

In 2020, one group of companies has done particularly well – the popular digital technology companies focused on e-commerce, delivery and entertainment, to name a few industries. In emerging markets, they dominate the Chinese market; but they can also be found in Korea, Southeast Asia, Eastern Europe and Latin America. We do not own many of these in the strategy; and as such, we are often asked: What holds us back? After all, they have performed well and – at least on paper – should have the prerequisite to generate strong returns and free cash flow, given their often high gross margins, negative working capital profiles and asset light nature. While we are not disputing the potential for this in the future, we would argue for cautiousness on most of these projections.

Though Covid hasn’t yet finished with us, the markets have finished with Covid. In real life, there is still plenty of misery to go around, but in our opinion things have seldom been better for investors. Optimism has served us well, as the money-printing presses have rolled to counter the “unprecedented” threat. In investment, perhaps it is better to be a stupid optimist than a clever pessimist. And, we believe markets do indeed go up most of the time.

This letter forms the first in a series designed to introduce and explain our approach to sustainability, and the lessons learned so far. We hope that these reflections, drawing on the team’s combined experience, will provide a useful insight.

Global listed infrastructure underperformed in 2023 owing to rising interest rates and a shift away from defensive assets. Relative valuations are now at compelling levels. Infrastructure assets are expected to see earnings growth in 2024 and beyond, aided by structural growth drivers.

We crossed six US states meeting over 70 infrastructure management teams as well as customers and suppliers at three conferences. We visited three corporate head offices, several regulators and toured the country’s largest nuclear power plant.