“China will definitely become the world’s largest stock market”

Dr. Stefan Albrecht is a man on a mission. He has a strong belief in the power of the Chinese economy. “COVID-19 has not thrown China off this trajectory to become the world’s largest stock market.” Meet Dr. Stefan Albrecht who will present an ACATIS workshop titled “The end of the economic success story or the beginning of a new economic world order?” on China’s vibrant economy during the Fund Seminar event on 29 September. In his presentation he will share insights about companies suffering from headwinds and those benefiting from tailwinds.

China – Another bear market or the next big investment opportunity?

  • The last 18 months have been difficult for Chinese equities.
  • The Chinese capital market has become disconnected from the Chinese economy and from the US and European capital markets.
  • China faces challenges on several fronts:
    • The unresolved Taiwan question and the escalation of the conflict linked to Nancy Pelosi’s visit
    • Adhering to the “zero COVID strategy” and the associated lockdowns and economic consequences
    • The real estate crisis that has not yet been overcome
    • The withdrawal of international capital due to negative investor sentiment and rising global interest rates.
  • But, there are also many positive signals:
    • End of regulation tsunami announced
    • Comprehensive government support for business, future technologies and renewable energy
    • Chinese economy keeps growing, exports at all time high
    • Chinese companies severely undervalued, under 20-year average. Asian hedge funds “double-down” on Alibaba et al.
    • Clear statement by the President that the government supports the capital market. N-Share delisting threats off the table through new agreement.
  • Has the U-shaped recovery already started?

Over the last years, Asia and China have emerged as economic powerhouses. However, most investor portfolios do not reflect this new economic reality. Asian and Chinese stocks are typically under-represented in most investor portfolios as well as in global indices. Consequently, investors miss out on potential investment opportunities and portfolio diversification. With China being on a trajectory to become the world largest economy globally, are investors wise to invest in one of the world’s largest stock markets? We asked Dr. Stefan Albrecht, Research Partner of the ACATIS QILIN Marco Polo Asia Fund, to share his perspectives.

Dr Albrecht: “COVID-19 regulations have not thrown China off the trajectory to become the world’s largest stock market and I have a strong belief that China is definitely on track to become the world largest economy. Whether it happens in 2028, 2030 or 2034—it will become a reality. We should not kid ourselves. I’ve been talking with Western companies and investors for decades. We always tend to think that something in China will go terribly wrong and that the whole system will falter. I’ve heard this story again and again. But look at the trajectory for the last 20 years: there’s been continuous economic growth, innovations in technology, etc. Just look at how educated and talented its people are. My core belief is that China is on this trajectory and we all better figure out how we deal with it. China is winning in the rest of Asia, Africa, South America, Eastern Europe— everywhere. Chinese market shares are rising all over the world continuously. Even last year, 2021, when the stock market was tanking, China’s imports and exports were the highest they’d ever been in its history. Whereas in the Western World people tend to think China is falling apart, the numbers tell a completely different story.”

Does that mean you have to do business in China or invest in China?                                                                                                    “One thing is clear, from my perspective, China is one of the biggest opportunities out there, but it is also one of the biggest threats. If you play this game wrong, you can lose big time globally. My perspective is don’t ignore China, understand it as well as you can and then try and draw the best conclusion. What does this mean for investors? From a wealth creation point this place has created more billionaires and millionaires than any other in the last decades. It has 500 million people that have moved from poverty to the middle class. No matter what metric you look at, it is the place to be in wealth creation. Now as an investor, how do you participate? As an international investor who wants to diversify, I believe you really have to ask: how can I best participate? You have to clearly understand the country’s trends and assess what that means for you as an investor.”

“In 2021, the biggest issue was the government regulation that was driven by common prosperity growth for all of its citizens. The government made it very clear to global investors that its people were the main priority. And indeed, some of the regulations were going very far, especially in the education area, where we also were invested. Highly profitable companies were literally being told that they had to be non-for-profit companies going forward because education for Chinese people should not be profit-generating. I can understand that investors ask themselves: should I invest in a country where the government is willing to destroy an entire industry? This is from my perspective what this is all about going forward, trying to understand China’s strategy with respect to the development of different industries.”

“In some industries it is fair to say that the risk of regulation is rather high. I would stay away from these. In other industries, China is aspiring to create profitable local leaders. Here, the government is willing to regulate in such a way that it is very beneficial for these industries. These are the industries that investors should look to for investment opportunities to earn outstanding returns.

Are these perspectives also the investment beliefs underlying the ACATIS QILIN Marco Polo Asia Fund?                                   “Yes, although I’m not sure whether we’ve been 100% right in predicting all of these trends. Clearly, we’ve made an effort to identify that there are industries with headwinds and others with tailwinds. And as a result, we have and we will further adjust the portfolio. Among these tailwind industries, when you ask Chinese people what they are most worried about, they will say pollution. So, there is a renewables trend. This is a very promising theme in China, whether it’s wind, solar or hydro power. China is also making a big push to become a leader in the electric vehicle space and they are quite well positioned. It’s not only about them leading in car production, they also have the leading battery suppliers, and the leading lithium suppliers. They are very strong in the entire value chain behind car production. These are the industries we are very bullish about and where we have increased our exposure.”

Which of the industries are currently suffering from headwinds?
“Education is one of them. Some of the former superstar companies with very impressive track records, such as New Oriental and Tal Education Group, are now trading at 10% of their original value. I don’t think education is the place to be for foreign investors right now. Other areas that have been hit in the past are the internet companies that are thriving in the gig economy, the equivalents to Uber and Delivery Hero, that provide services using cheap labour. Here, China says ‘it can not be that we create billionaires whereas their employees must endure bad working conditions.’ In these areas, China will continuously interfere, as we do in the West, by the way.”

Can you give us an outline of the ACATIS QILIN Marco Polo Asia Fund?                                                                                                  “We are an Asia Fund, with a China overweight of 70%, the other overweight being in the technology space. Over the last 18 months that was not an ideal exposure to have. China was a poor performer and tech was amongst the worst performers in China. China will catch up versus other Asian economies and we believe that tech will catch up versus other sectors. Some of the companies that have performed well are Hong Kong listed tech companies. Likewise, Shenzen and Shanghai listed tech companies have also done well. Some of the brands that have performed well are BYD Co. Ltd. (“Build Your Dreams”), a publicly-listed Chinese conglomerate and electric vehicle manufacturer headquartered in Shenzhen. There is also CATL, the world’s largest battery maker and leading battery supplier for electric vehicles. These are representative of other companies in these spaces.”

What will be the key message to the Fund Seminar audience?                                                                                                                   “What is important is to explain the key drivers of the poor performance of the last 1.5 years. It’s about regulation, about the worry that the zero COVID strategy would not work, whereas now it seems that the Chinese strategy has really pulled it off. China has said the key regulation has been introduced and that from now on things will get better. It is unlikely that this comes back and will hurt investors. China is making a comeback in all areas, factories have opened up, and the key concern that we had is gone. The other thing is the trade conflict with the US and all its second-level concerns. Of the three stock price challenges of the last couple of years, two are clearly gone. One of them is still there. If we compare this with the rest of the world, we have inflation and interest rates going up, whereas China is going the opposite route. China is actually reducing interest rates and coming up with stimulus packages to be able to guarantee 4% GDP growth. China is recovering nicely, so if you make your allocation going forward it might not be a bad time to consider China.”

About the ACATIS QILIN Marco Polo Asia Fund                                                                                                                                                The ACATIS-QILIN Marco Polo Fund is an actively managed UCITS fund that invests in companies whose headquarters are located in Asia. The investment universe includes mainly shares of Chinese companies that are eligible for investments through Stock Connect (Shanghai and Shenzhen), as well as Chinese companies that are listed outside of the Chinese mainland. The fund also invests in Asian markets including, Hongkong, Taiwan, Korea, India and Singapore. Portfolio management and distribution is assisted by global partner ACATIS Investments GmbH. The MSCI AC Asia GDR (EUR) is used as a reference index. The fund does not strive to depict the reference index, but rather aims for absolute value growth that is independent of the reference index. The fund may enter into derivative transactions to hedge asset positions or generate higher values. The Qilin Capital core team is based in Shanghai, Berlin, and Munich.
Each member of the team has lived and worked extensively in Asia and in China.Qilin (ch’i-lin) means ‘unicorn’ in Chinese mythology.

Dr. Stefan Albrecht, founder Qilin Capital                                                                                                                                                         Qilin Capital was founded in 2014 by Dr. Ingo Beyer von Morgenstern and Dr. Stefan Albrecht. They launched their first China fund in 2015. The ACATIS QILIN Marco Polo Fund is their second fund, launched in 2019. Each member of its Asia team has lived and worked in Asia for the majority of their careers. The two co-founders were former directors at McKinsey & Company in the Shanghai and Beijing office. The core research team is based in Shanghai, conducting on-the-ground research in China. Dr. Stefan Albrecht is an industrial engineer by background. He was awarded “Scholar of the German Nation” and is Honorary Professor at Tsinghua University. Website: www.qilincapital.org

About ACATIS                                                                                                                                                                                                         ACATIS (founded in Frankfurt in 1994) is a specialized value manager in asset management. An investment style that is based on the “genuine“ value of companies and markets, ACATIS believes, will out-perform a passive or trend-oriented investment policy in the long term. Whilst wider price fluctuations may occur with this style, value investing is successful in the long term, due to the fact it is geared towards the value and not the price of companies. Over the long-term, value investing has out-performed other approaches. Take for example ACATIS’ flagship global equity fund (ACATIS Aktien Global), which has returned 987% since inception (as of December 31, 2021) (vs. 567% MSCI World). Website: www.acatis.com

Disclaimer                                                                                                                                                                                                                This information provided by Fund Seminar is wholly indicative, for discussion purposes only and does not represent an offer or invitation, investment advice or any kind of financial service.

Dr. Stefan Albrecht, Research Partner of the ACATIS QILIN Marco Polo Asia Fund