Investing in China: Consumers and technology recovering

This Equity Markets issue offers a window into post COVID-19 economic recovery.

Preview

China has been much in the news recently as it handles the COVID-19 virus, and because of political and trade tensions with the West. We continue to believe China remains a growth opportunity for investors. Indeed, by early-March, the Chinese A-share market hit a 12-month high and was one of the world’s best-performing equity markets. Our emerging markets team was on the cusp of publishing fresh thoughts on China in January when Beijing locked down China’s economy to flatten the COVID-19 infection curve. In scenes that were soon replayed across the globe, factories, offices, restaurants and shops all closed. Although China’s economy is opening again, it’s not back to normal. Companies like Foxconn, which assembles iPhones for Apple, aren’t back to full employment due to sagging global demand. Overall, retail activity is improving, but discretionary spending remains muted, while lingering anxieties over infections are accelerating consumer migration to more online purchases and home deliveries. That said, the macro themes and companies our emerging markets analysts wrote of in January remain relevant to investors looking for growth opportunities today. In the near-term, we believe the business prospects for the companies we highlight have brightened. Whether trade tensions eventually prompt companies like Apple to pull supply chains out of China remains to be seen. This updated discussion offers a window into a post-COVID-19 economic recovery.

Innovation at work

In the wake of the global COVID-19 recession, we believe China’s long-term prospects remain intact. China’s ability to innovate (not simply replicate) in areas like artificial intelligence and e-commerce offers significant long-term opportunities for equity investors.

From our vantage inside China, analyzing China-based companies starts with a top-down view of Beijing’s industrial policies, which can drive systematic risks and profitable tailwinds. “Made in China 2025,” for example, earmarked RMB¥2.08 trillion or US$282 billion in 2015 to speed up China’s shift to a new economy that’s oriented to home-grown technologies and China’s expanding middle class.

To bring aspects of our security analysis to life, our Shanghai- and Hong Kong-based analysts have divided their discussion into three companies—each highlights a macro investment theme that shapes our China equity strategies.

Three takeaways

  • China has shifted its manufacturing sector from low-cost output toward high-tech exports—requiring a flexible and educated workforce. We think Luxshare Precision represents one upside of China’s investments in science and technology education. It resumed full production of Apple’s technically complex AirPods in early-March.
  • With the world’s second largest consumer class, more of China’s consumers are gravitating toward higher-quality premium brands, including locally grown ones like Three Squirrels. Its ability to transform a humdrum commodity—nuts—into a sought-after millennial brand offers fresh insights into China’s “premiumization” trend. As online purchases soared during China’s lockdown, Three Squirrels’ revenues jumped nearly 25% in 2020’s first quarter.
  • China’s innovation in high-tech fields helps explain the dramatic rise of its largest technology start-up: ByteDance. As investors in Chinabased technology firms that compete directly with ByteDance, which is privately held, it’s important for us to stay closely abreast of its rapid evolution. Its ability to engage consumers globally with algorithms showcases how “Internet Plus” strategies can drive ad revenues through the mobile internet using big data analytics. With the popularity of its apps skyrocketing globally, ByteDance announced in April it’s hiring 10,000 new workers.

Franklin Templeton Thinks: Equity Markets highlights the global views our equity investment teams have across developed and emerging economies, sectors and individual companies. Each quarterly issue spotlights fresh insights that our analysts and portfolio managers bring to active security research, examining risks and opportunities from both growth and value frameworks.

Contributors

Stephen H. Dover, CFA Head of Equities,
Franklin Templeton

Manraj S. Sekhon, CFA Chief Investment Officer,
Franklin Templeton Emerging Markets Equity

Michael Lai, CFA Portfolio Manager,
Franklin Templeton Emerging Markets Equity

Vivian Chen Xushan Senior Research Analyst,
Franklin Templeton Emerging Markets Equity

Tony Sun Research Analyst,
Franklin Templeton Emerging Markets Equity