It’s Capitalism, but not as we know it, 06/08/2021
A major topic of discussion at our recent Investment Committee meeting was the recent developments in China, where the Chinese Communist Party (CCP) again flexed its muscles, this time in the education market. This followed the suspension of Alibaba’s Paypal equivalent ‘Ant’ float in 2020, a clamp down on Alibaba’s founder Jack Ma and a record $2.8bn fine on Alibaba.
A quick dive into this latest move shows both why we need exposure to China and Asia generally and why there will be bumps in the road. To see why we need exposure to Asia, consider the T-12 student populations. T-12’s are students between age 5/6 and 17/18. There are 10.5m in the UK. In China there are already 230m and the Government there is trying to increase the birth rate after the ‘one child’ policy. In India there are 250m, a number that is already growing at quite a rate.
The ‘after schooling’ of these T -12’s has become a lucrative market for Asian tech giants such as Tencent and Alibaba along with hosts of specialist ‘Ed Tech’ stock listings on the US Nasdaq and Hong Kong exchange.
With the cost of educating a child in China soaring, deterring families from having more than one child and with the feeding frenzy of companies exploiting this seen to be increasing inequality, the Chinese Government has intervened. They have halted foreign listings and fund raising in the sector and are forcing companies on to a ‘not for profit’ basis. The intervention highlights both the speed and power of the Chinese Government when it acts, but also the massive social issues the country faces as its 1.4bn population stops growing. The economy continues to grow but so too its wealth divide in what is supposed to be a Communist state. It would be wrong to see these moves as completely anti-capitalism but it is probably a form of capitalism we are not used to in the West.
Our general conclusions:
· Emerging Markets are volatile: In 19 of the last 20 years emerging markets have had a drawdown of at least 18% from the peak. Furthermore, on average over the past decade, 65% of emerging markets stocks within the MSCI EM Index move by more than 40% per year.
· In this context, the Asia tech giants, losing c.40% of their value since peak, is not such an uncommon occurrence. Education tech stocks fell in region of 70 to 80%, though our exposure in this area is minimal. Market timing in less volatile regions is difficult but almost impossible in Emerging Markets.
· We are pleased to have active management in this complex region, which has clear opportunity but the extra dimension of less predictable and more powerful political intervention.
· Despite these large moves, all managers in Asia and Emerging Markets have delivered alpha versus their benchmarks year to date and have been some of our strongest relative performers historically.
· We should stay as long-term investors and with Asian markets 10-15% off their recent highs, as well as US and European markets close to all time high levels, switching to more expensive shares did not seem a good move.
These views so far have proved beneficial with a modest recovery in our funds in these regions which have all navigated reasonably well around the drama. We are please to have TS Lombard’s considerable expertise and presence in Asia and will be paying close attention to their views in the coming weeks and months on this important area.
Investment Insight, 06/08/2021
Investment Insight, 23/07/2021