The Great Divergence Between East and West

China bounced back quickly mid-2020 after a severe contraction and downturn, with data now indicating a return to 5-6 per cent growth. Domestic air travel is back to 2019 levels, auto sales are rising and luxury sales are up to 20 per cent higher than this time last year.

For Roderick Snell, an enduring feature of this crisis has been that the strong have got stronger. He cites CATL, the battery maker as an example. “It’s seen a number of competitors go out of business. It’s taken market share, and I think we will see super-normal profits for a few years going forward.” He also points to tech, where a surge of users has allowed businesses to scale up far more rapidly than they would have done – businesses such as Meituan Dianping, the online food delivery business. It’s grocery business, which is relatively new, saw a 400 per cent increase in users over the crisis period.

Snell believes we’re at an inflection point, where a lot of capital starts to look east. The choice is stark. “If, as an investor, you ask yourself where do I want to invest? Will it be in countries in the debt-laden west, who have expanded their balance sheets by trillions during this crisis, have told us quite clearly that zero or negative interest rates are here to stay, and have very little growth?” Or, he adds, “Is it countries like China, with decent structural growth rates, that haven’t blown up their balance sheets and have sensible interest rates?”

For him, it’s no contest. The crisis has accelerated existing trends, including the number of people moving online to visit their doctor. Snell explains, “Back in 2003, SARS was the catalyst for ecommerce in China. Today, the crisis has engendered a permanent shift online, in areas such as GP services and food delivery. For example, the online surgery Ping An Good Doctor enables GPs to review about 500 patients a day [achieving] double the accuracy of a normal doctor.”

China, he says, is too big for investors to ignore. “It’s got the largest middle class in the world, the second largest economy, and is going to be growing at 5-6 per cent for the foreseeable future. Plus, it’s under-owned. It counts for about 18 per cent of global market cap, 30 per cent of listed stocks, yet just 2.5 per cent of global funds.”

This combination of world-class innovative companies and an incredibly inefficient market means an active investor in China can add a lot of value. Snell points to Baillie Gifford’s Emerging Markets Team, which has been investing in China for more than 25 years, “We’ve consistently added most of our value in China, thanks to its inefficiency. The market is very retail driven. The average holding period is often less than 50 days. So, our long-term time horizon, of 5-10 years, becomes a differentiated edge.”

Nor is Snell fazed by poor trade relations between China and the US, which he sees as an inevitable consequence of a rising superpower challenger. Indeed, he believes the competition will encourage China to double down on everything from innovation and technology to research and development (R&D) to ensure that it’s self-sufficient and globally competitive.   He points out that on pure R&D spending, China already spends more than Europe and is catching up, or will have already caught up, with the US. It certainly files more patents, he notes.

Snell explains his optimism, both in terms of the size of the opportunity and the companies set to take advantage, “Companies such as Alibaba and JD.com have created by far the largest ecommerce market in the world. China is larger than the next 10 largest ecommerce markets in the world today, more than double the size of the US ecommerce market. In areas like batteries and electric vehicles, China dominates. About half of all electric vehicles are in the Chinese market, and there is a huge aspiration to get to 25 per cent of all cars being electric within the next five years.”

He’s also aware of the opportunities arising from increasing Chinese national pride. A lot more Chinese, particularly the young, now prefer local brands to western. He cites Li-Ning, a sportswear maker, “We're seeing, particularly the under 30s, shift away from Nike and Adidas towards companies like Li-Ning. This creates lots of opportunities for stock pickers.”  

As to China’s future trajectory, Snell cites Napoleon, who once likened China to a sleeping giant who “when she wakes, she will shake the world.” Today, China no longer sleeps. She is awake and rising.  

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