Despite the doom and gloom narrative, what is happening on the ground may be a little different. China continues to offer significant investment opportunities especially for stock pickers as well as high volatility but the decision to invest should be based on individual preferences, risk tolerance, and specific financial goals. A macro manager report landed on my desk while I was having my coffee break.
Here is a section:
After an initial brief rally early in the month, Chinese equities continued to drift lower despite several encouraging announcements. These included a likely confirmed meeting between Presidents Biden and Xi, better than expected 3Q GDP growth and a rare mid-year budget expansion stimulus of RMB 1trn. Although recent economic data pointed to a somewhat mixed picture in terms of macro recovery, on the ground we are seeing recovery trends and strong earnings momentum across the companies and sectors we are invested in.
Based on recent meetings and updates from our major holdings, we are seeing signs of a much brighter outlook, and specifically, higher quality growth in our focus areas, with an ongoing bottoming out of the property sector dragging overall growth lower. We are confident that our companies will be able to achieve their full year earnings guidance.
A commonly held view among the investment community is that the bigger a company is, the slower it will grow. The reasoning is due to the “base effect”, i.e. a bigger base will inevitably lead to slower incremental growth. However, based on our observation, there are exceptions to this rule in China, even in the current environment of more subdued sentiment.
As a company grows larger, higher growth rates will become increasingly difficult to achieve, but given China’s scale, the opportunity to successfully launch new brands and new business lines, or benefit from positive operating leverage, makes maintaining high growth rates very achievable.