Investing Strategies: Abrdn: Not too late to increase allocation to Chinese equities

This article first appeared in Wealth, The Edge Malaysia Weekly, on February 27, 2023 - March 05, 2023.
Yeo: China’s long-term investment case remains intact amid reopening catalysts, key structural growth trends and attractive valuations

Yeo: China’s long-term investment case remains intact amid reopening catalysts, key structural growth trends and attractive valuations

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China and Hong Kong’s markets have surged by a third since the lows last November, as the easing of pandemic curbs puts these economies back in business. Yet, with short- and long-term opportunities on the horizon, it is not too late for investors to consider increasing their allocations to Chinese equities, says fund manager Abrdn’s head of China equities Nicholas Yeo. 

Unlike further monetary tightening undertaken by other major economies in a belated bid to rein in inflation, China is engaging in monetary easing. The easy policy stance coupled with low inflation has bolstered economic and earnings growth, providing investors with a more conducive and accommodative market than the rest of the world. 

Second, the Chinese market is nurturing smaller innovative companies to become next-generation tech giants. These companies, some of which are semiconductor and automation players listed on the Shanghai Stock Exchange Science and Technology Innovation Board, are providing earnings per share (EPS) growth of a compound annual growth rate (CAGR) of 25% to 30% for the next three years, says Yeo. 

China is also cheap relative to its global peers. The market is trading at a steep discount to its historical averages. As at Dec 8, 2022, on a price-to-book value (P/BV) basis, Chinese companies are trading at a 35% discount, versus the 8% discount of emerging markets and 29% premium of developed markets. 

“While we are caught up with macro regulations, these companies are providing excellent growth but were drowned by the negative press,” says Yeo, referring to China’s tech crackdown. “This is why I believe it is not too late for investors to participate; the price-earnings-to-growth ratio is still less than one, which is why it is a good time to buy, especially those with a three- to five-year investment horizon.”

The ‘right’ side of the government

Since relaxing its zero-Covid measures in December last year, China has seen a surge in coronavirus infections, impacting megacities to tier-3 cities. The country’s National Health Commission estimated that nearly 37 million people might have been infected with Covid-19 in a day in late December, with nearly 18% of the population likely to have contracted the virus in the first 20 days of the month. 

Yeo does not doubt that infections will continue, causing China to muddle through the first half of the year. However, he is optimistic that consumption will rise following the first wave of infections, being the main driver of the country’s economic growth this year. “The upper-tier cities will lead the recovery, while resources are channelled to lower-tier cities to manage infection risks,” he says, adding that hybrid immunity can be achieved by the end of the second quarter. 

Against this backdrop, Yeo says investors will be able to find good opportunities by being selective in five areas he considers to be on the “right” side of the government — aspiration, digital, green, healthcare and wealth management. 

The first area — aspiration — refers to consumer goods and discretionary producers seeing growing demand even in the lockdown periods. These could be producers of premium snacks or alcohol brands, which benefit from the lifestyle inflation among the younger, emerging affluent population in China. According to Yeo, this population will continue to aspire to a higher standard of living and hence be willing to pay more to enjoy these premium products.

As at Dec 31, Kweichow Moutai — brewer of China’s most famous liquor —had taken up 6.3% of the Abrdn All China Sustainable Equity Fund, as indicated in the fund fact sheet. China Tourism Group Duty-Free Corp, as the name indicates, is in the duty-free retail business. The stock accounted for 2.7% of the fund’s holdings.

The second — digital — refers to the hardware and software counters in the technology sector. “Although the tech regulatory crackdown has left a bad taste in investors’ mouths, the regulatory enforcements are not unique to China. Other countries such as the US have also enforced similar regulations to achieve similar results, although China’s policy execution and enforcement may be less opaque and uncertain,” says Yeo.

Tencent Holdings, China’s leading internet company behind the ubiquitous multi-purpose app WeChat, is the largest holding, taking up 9.8% in the Abrdn All China Sustainable Equity Fund. Meituan, the company behind the popular food delivery app, accounted for 4.8% of the fund, while e-commerce giants and Alibaba Group Holding accounted for 4% and 3.9% respectively.


China is becoming more self-sufficient in its technologies to reduce its reliance on component imports. It imported US$381.2 billion (RM1.68 trillion) worth of integrated circuits during the first 11 months of last year, buying the chips at a higher cost as the imported units were 14.4% lower in the same period the previous year. 

This, in turn, created many opportunities for investors to look at the participants of the entire supply chain. For instance, there are good names in the areas of semiconductor equipment suppliers as well as assembly and testing service providers. On the software side, there are localised software and counterparts of foreign brands in enterprise software and cybersecurity that investors can identify. 

On the energy front, China imports about US$250 billion worth of oil and gas, says Yeo. Instead of digging for more oil in the South China Sea, the current priority is to decarbonise to reduce the reliance on oil and gas imports and mitigate the risks of hostile foreign relations. It would also solve China’s domestic pollution issues. 

A paper released by the Fairbank Center for Chinese Studies at Harvard University found that China initially made forays into clean energy technology for export before setting up a domestic market when conditions for outward investment and trade turned sour. Today, it leads the world in renewable energy production figures, being the largest producer of wind and solar energy globally.

Over 80% of the solar supply chain is dominated by China, says Yeo. Battery maker Contemporary Amperex Technology Co (CATL) accounted for 2.9% of the fund’s holdings. The Fujian-based company is the world’s largest producer of lithium-ion batteries used mainly in electric vehicles. 

On healthcare, Yeo says China hosts an ageing population — the current median age of the population is 35, but it is set to increase to 46 by 2050. He adds that there is a huge gap in healthcare, health products and ancillary services to meet the needs of this ongoing trend.

Still, investors need to be selective — within the healthcare sector, companies that Abrdn avoid include generic drug makers, which suffer from a global price push-down. Instead, it invests in research and development companies that provide services to innovative drug makers, which are not subject to price regulations. 

The last area with significant investment opportunities is wealth management, on the back of the country’s economic expansion. According to a report published by the Hurun Research Institute and Citic Prudential, the number of Chinese high-net-worth families rose 1.9% in 2021 to nearly 2.1 million, with their aggregate wealth growing 27% to RMB160 trillion (RM103.2 trillion). 

“Given that it is no longer taboo to talk about death, more Chinese citizens are thinking about the need for insurance and wealth preservation,” says Yeo. China Merchants Bank, which runs a wealth management unit, accounted for 4.1% of the fund’s holdings. Bank of Ningbo accounted for 3.2%.

Yeo says China’s life insurance penetration rate is severely low and has even worsened during the pandemic to about 2% to 3%. It is set to grow and consultancy firm Oliver Wyman says China’s life insurance market is expected to grow by as much as 13% per annum after the country’s disposable income per capita hits the US$7,000 to US$10,000 tipping point, reaching a penetration rate of 11% to 13% by 2040. Leading insurer AIA Group accounted for 2.9% of the fund’s holdings.

Additionally, the Chinese government’s move to curb the real estate market to make it less speculative drives wealth to other asset classes, naturally shifting the population’s allocation to equities and fixed income. But Yeo says the real estate sector will continue to be challenging despite being heftily weighted towards China’s economy. Over the past few years, the government has implemented policies to curb property prices because of overleveraging worries. Determining winners in a hazardous environment will be difficult as even the best quality names are struggling with funding issues. He adds that China’s long-term investment case remains intact, reiterating its reopening catalysts, key structural growth trends and attractive valuations.  

Khairani Afifi Noordin is a senior writer at The Edge Singapore