China is poised to be among the fastest-growing economies in the next decade. Its economy is positioned to grow at a significantly higher rate than the global average, thanks to strong inflows of foreign direct investment, accelerating public sector reforms, and robust consumer spending.
– How do you determine which companies would be most suitable for investment by the portfolio?
Our long-term strategy is based on the idea that as China's 1.400 billion people increase their wealth, consumption will grow proportionally. Chinese consumers have only recently discovered the high-end consumer goods market. In 2002, annual passenger car sales in China were one million units, compared to 17 million units sold in the United States. At the same time, we are also aware that since 2001, when China lowered tariffs to gain entry into the World Trade Organization, competition has intensified significantly. Therefore, we seek companies that are winners in terms of market share and maintain strict cost controls.
Thanks to its inexpensive labor, China has attracted direct investment from many foreign countries. We look for companies that benefit from this type of outsourcing to China. For example, we hold shares in a Hong Kong-based company, Johnson Electric, which produces microprocessors for various applications, including machine tools. Its client is Techtronics, a Home Depot supplier.
Investing in China has historically been considered a risky undertaking. How can you identify companies with suspicious financial histories or uncertain growth prospects?
China is still an emerging market with several risks associated with investing there. For example, the rapid pace of reforms in the financial system and state-owned enterprises could stall at any time. Furthermore, many publicly traded companies have a short history as private businesses and still have the state as their majority shareholder. We expect these risks to persist.
Therefore, we conduct a rigorous selection process when choosing stocks. We emphasize strong corporate governance when analyzing different sectors and stocks. We also favor companies with good management teams, solid balance sheets, and transparent corporate structures.
– Which sectors in China currently appear to have the greatest growth potential?
The consumer and infrastructure development sectors have the most promising growth prospects. As we have explained previously, we believe that consumer-related businesses will thrive as a result of China's burgeoning wealth effect. Infrastructure development, including transportation and ports, will benefit from increased trade. In the year ending last February, China's exports rose by 27,8%, while imports increased by 49,4%. China is currently Taiwan's largest export destination, accounting for 35% of its total exports.
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