China: Biting change creates opportunity
Also Interesting
Market Commentary
This year has been one of material reform in China: policy makers have rolled out biting change within the financial sector, there has been tightened regulation around online activity and a continued reduction of excessive supply in key industries. These moves, against a background of uncertainty over the trading outlook for the country, has had a clear effect on domestic confidence, putting pockets of the economy under pressure. China, however, has a highly diverse economy, so while change can be a challenge, it also creates opportunities. The overhaul within the financial sector, for instance, will likely create material stress on some business models, but is also likely to mean more deposit and lending opportunities for firms already in-line with regulation. Similarly, for online commerce platforms, new requirements on merchant registration and ‘shared liability’ on products sold is a sizeable risk for certain sites, but an overdue tailwind for those with already evolved risk processes. More broadly, ongoing supply reductions driven by rising standards will materially harm some businesses, and yet for others it supports an improving competitive landscape and more pricing power. In our view, these changes are far from reflected in equity valuations. We are going into 2019 with a less supportive macro-economic backdrop, but we believe the increasingly divergent outlook within China’s corporate universe should gradually be reflected via a decoupling in valuations across the market. This will likely be most apparent in the small/mid cap part of the market, where considerable underperformance has created several highly attractive bottom-up opportunities.
