This article was first published as a Fundie Q&A in the Australian Financial Review on 5 January 2023 and is reproduced here under licence.
By Emma Rapaport
John Moorhead is the Head of Global Emerging Markets at Maple-Brown Abbott.
How should investors be thinking about the China reopening theme?
Despite initial exuberance around a reopening, we would expect volatility, like we have seen in the developed world. That volatility will no doubt create investing opportunities.
Which stocks do you hold with exposure to the China reopening theme?
I think in reality, almost all the China equity market will benefit from the reopening. That said, it is the Hong Kong listed H shares where sentiment was particularly weak that have seen the sharpest recovery.
The last reported measures of consumer confidence in China were just off all-time lows. A reopening and a rebound in confidence and retail spending will flow through to consumer names like Alibaba. Despite the Alibaba share price gaining around 40 per cent from late-October lows, it is still trading on 11 times consensus forward earnings.
The real estate market has been the most ravaged, but government policies have moved to become more supportive. If a reopening brings back consumer confidence and enables buyers to get out to inspect properties for purchase, we expect that companies like Country Garden Services could see a continued rebound.
Long-term, is a post-COVID China worth investment?
The days of high single-digit GDP [growth] are clearly over. The headwinds facing China, such as an ageing population and an overly indebted property sector, are well known. However, within that, we believe there will still be opportunities for investors to be selective.
Localisation of critical content (think seals for nuclear power stations) has clear government policy support with the central government designating more than 9000 ‘little giants’ that have specialist know-how in strategic sectors to receive funding and other incentives.
Another example is health care. China’s spend on health care at 5 per cent of GDP is about half the world average. Combine that low level of spending with an ageing population and we see many opportunities arising in China’s health care space.
What’s an EM stock you’re excited about that we’ve probably never heard of?
Sendas Distribuidora, better known by its brand name, Assai, is the largest pure play cash and carry retailer in Brazil, with 234 stores mainly in the wealthy states of Sao Paolo and Rio de Janeiro.
We like the business model of discount supermarkets. Assai has consistently been highly cash generative with negative working capital and cash flow returns on invested capital around 30 per cent. In an environment of higher inflation and squeezed consumer budgets, we would expect consumers to move towards this lower-priced format.
We believe Brazil has plenty of room for the cash and carry format to grow in the years ahead considering other grocery formats still have the majority share.
What’s the most frustrating position in the portfolio?
Hangzhou Tigermed. The stock has been caught up in the negative sentiment surrounding China, with its valuation multiples more than halving. Yet, the fundamentals around a growing spend on drug research and a growing portion of trials being outsourced remain in place.
The onshore listed A share hasn’t suffered from the same negative sentiment and trades at more than a 30 per cent premium to the Hong Kong listed H share. That is frustrating, but as long as the good operational results continue to come through, we can be patient.
Best value dining in Sydney? What’s your go-to order?
Having moved back to Sydney in lockdown with four children and starting a new fund, I haven’t made it far past Manoosh Pizzeria at the end of my street. They’re our go-to for a Friday night margherita and the chips are dangerously tasty.
Any TV shows or podcasts you’re into lately?
‘How Other Dads Dad’ by Hamish Blake. The first episode with Rob Sitch was a great reminder on how much joy children get from the simple things like breakfast being delivered through a hole in the wall in a country motel. There was a lot of good advice in there, and it brought back memories of the very same holidays I did growing up.
On the investing side, Edward Chancellor’s interview on Masters in Business where he discusses the history of interest is well worth a listen, especially given the changing macro landscape we are in.