We have had zero direct Chinese exposure in London & Capital asset allocation whilst we waited for the myriad of issues to be suitably resolved. Of course, there is indirect exposure via most global companies selling into China – either receiving inputs into their goods, or goods being made within China.
Our analytical process to China has been driven by a three-pronged approach.
This continues to focus on the weakness of the post-Covid recovery, the importance of long-standing structural issues that have come to the fore and unsurprisingly geo-political concerns given faltering growth that have also come to the fore. These concerns cover a number of further issues including Russia, the longer-term resetting of the power struggle between the US and China, China’s role and influence in Asia as well as Africa amongst others.
There is clearly a big gap in the thinking around China, with some analysts arguing that the authorities have a good handle on the longer-standing issues, while others argue that the current issues can sap markets and potentially, lower growth rates – which is hugely damaging. Most of these long-term sources of concern have been well-flagged, i.e. property deleveraging, bad loans, a bloated and highly indebted state-owned enterprises (SOE) sector, poor demographics, over investment in sectors that are moving away from China as supply chains revert back to the US and Europe, a highly leveraged banking sector and over-reliance on fiscal pump-priming over the past couple of decades, leading to misallocation of resources.
The key questions for us are whether Chinese authorities can avoid a damaging implosion (that Japan failed to do)? Also, do they have the fiscal and monetary tools to deal with the economic weakness? There can be no definitive answers to either of these questions, but what we can state is that if Chinese growth does stabilise, it will help our exposure in global growth companies. If on the other hand, China continues to disappoint, our lack of direct exposure will shield portfolios from the further declines in asset values in China.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q4 2023 here.