In recognition of the Strategy’s three-year anniversary, what gives China Equity a unique edge?
The China fund was launched in July 2022, and we are off to an encouraging start.
Like our Asia fund, which has over 15 years of history, we have adopted a contrarian, bottom-up approach and run a concentrated portfolio. We invest in both attractively valued high-quality and lower-quality companies.
China is a large and inefficient market, with significant breadth and depth. It is very news- and sentiment-driven in the short term, which leads to high volatility. This environment is ideal for stock pickers to identify mispricing opportunities.
In our view, the Chinese market has evolved in recent years. It was once a high-growth, speculative market where most companies benefited from rapid domestic expansion. However, as growth has slowed, only the most competitive companies can excel. Additionally, applying successful Western models to the Chinese market has become less effective. Instead, domestic companies are now exploring new business models, technologies, and products to create demand in an already sophisticated market.
For these reasons, we expect company performance in China to diverge significantly, making stock selection a key differentiator. Furthermore, the economic cycle is likely to become shorter, which suits contrarian investors who seek to capture mispricing opportunities and recycle capital as turnarounds materialize.
I also want to remind the audience that, as the Chinese economy faces multiple challenges, the risk premium priced in by global investors is high. As a result, the general market remains cheap, which is good news for stock pickers—it’s easier to find compelling, company-specific investment cases. In contrast, it would be difficult to find undervalued companies if the overall market were significantly overvalued.
It’s easy to overlook that the Chinese economy is still growing at a decent pace, despite negative headlines in recent years. In fact, China is aggressively gaining global market share in consumer electronics, automation, shipbuilding, gaming, and pharmaceuticals. In terms of AI capabilities, China is second only to the US and is catching up quickly in semiconductors. Moreover, in sectors such as robotics, social media, home appliances, electric vehicles, and renewable energy, Chinese companies are setting global standards and competing at the highest level.
In conclusion, we believe China remains a dynamic market full of opportunities. Investors just need to be more selective. As stock pickers, we believe we can always find compelling, company-specific investment cases in this massive and diversified universe.
