But meanwhile there has been a regulatory loosening up, he says—VAT tax cuts for the manufacturing and transportation sectors and a loosening of reserve requirements at banks. “My overall impression is that the banks are not keen at this stage—the country is not keen at this stage—to have a big, big stimulus like it did in the 2008-2009 period. Because that ultimately led to a lot of the poor spending and the nonperforming loan issue, and they don’t want to revisit that if they can avoid it.”
For that reason, because bank lending has been shallower, bank stocks have fallen a bit in price and are “quite modestly valued,” Donald said. Internet-related companies and retail, by comparison are relatively expensive, he said.
“The Chinese economy is fairly large,” said Jin Zhang a portfolio manager at Vontobel Asset Management. “And it’s having a significant impact on neighboring countries and EM as a whole and broadly on the global economy.” But again, the composition of that economy is more complicated than people give it credit for, Zhang says. The provinces on the Eastern Seaboard are more affected by the exporting economy, he says, but the inland cities are much less exposed to things like trade wars.
Net exports as a percentage of GDP have come down in the past 10 years in China, Zhang adds. Technology and e-commerce are playing more of a role, while consumer staples have seen more stable growth by tapping into the middle class.
“If you think about the smaller cities, people are just starting in the habit of buying things online,” Zhang says. “If you look at the number of transactions, it’s increasing. Even in rural China, people are getting into e-commerce. So that’s another area that will give e-commerce some longer-term growth.” In finance, he says Alibaba’s Ant Financial has a strong presence in the mobile payment business and the largest money market fund and is doing a lot of lending to consumers and small and medium-sized business. “The banking industry in China is not very well entrenched. … People just don’t have an affinity with the brick and mortar banks. So for someone like Alibaba, it has a good brand.”
He says consumer products helped propel the growth of Vontobel’s Emerging Markets Equity strategy in the first quarter, especially alcoholic beverage maker Wuliangye Yibin, whose A share price almost doubled in the first quarter. It was the top contributor to the fund despite the anemic economic growth.
But even consumer products have their challenges. Zhang said his fund got out of a dairy company because of the fierce competition in that industry. Despite long-term growth in dairy, “this competition in either pricing or discounting or even just advertising wars, these things are compressing margins more than we would like to see.”
Derek Hamilton, a global economist at Ivy Investments, says the Fed’s backing off higher interest rates will have a salubrious effect on all emerging markets, as would the dollar if it were to weaken. “If you look at the data coming out of China … you’ve seen the deleveraging campaign essentially come to a halt, credit is starting to reaccelerate. … It looks like infrastructure investments are picking up, housing is stabilizing. All of that should mean growth in the back half [of the year] looks better.”
“If you look at industries that are likely to benefit from the trade war,” says Oh, “they’re going to be focusing on stronger IT protection; that’s going to benefit home-grown innovative companies.” He also likes media companies and internet services companies. In China, “people rarely use credit cards or cash. They use mobile banking. … There’s an entire generation that grew up with e-commerce. They are more close to e-commerce companies than offline brick and mortar.”