Will a focus on ‘common prosperity’ harm China’s private sector?
Salman Siddiqui, Fund Manager, Global Emerging Markets Focus, explains why he doesn’t think China’s focus on common prosperity will be negative for the private sector over the longer term.
After a very strong 2020, China continues to be a drag on emerging market performance this year, given its slowing economy and an increase in regulation, particularly in the internet space.
In addition, last month, President Xi stated the need to create a society with greater ‘common prosperity’, which has also likely contributed to negative sentiment. It is a term being emphasised more and more, and it comes from the government’s view that society in China is becoming more unequal. The richest 10% in China own over 60% of the wealth, which is relatively unequal compared to many other major economies, though inequality is greater in places like the US, for example. Clearly, China has a lower tolerance for this kind of inequality, however.
So how is China looking to achieve ‘common prosperity’? It’s a relatively ambiguous term, and there are concerns from some that it means a return to its communist past, or a kind of ‘Robin Hood’-style redistribution of wealth. However, in reality, we think it’s about placing greater emphasis on income generation and wealth creation, rather than redistribution.
The government has a target to double GDP from 2020 to 2035, implying 5% annual growth over the 15-year period, which is no easy task. Private businesses contribute over 50% of tax revenue, 60% of GDP, 70% of innovation and 80% of employment. Quite simply, this means China cannot grow, or enjoy prosperity, without a strong and dynamic private sector – in other words, we don’t expect China to kill the goose that lays the golden egg.
While we don’t have specific policy detail at the national level yet, in June the government chose to pilot common prosperity policies in Zhejiang, China’s third richest province. Zhejiang is home to some of the most successful private companies in China, and is an interesting case study in how the government plans to deal with inequality and to treat the private sector.
Several goals have been outlined for this pilot, such as increasing wages as a percentage of Zhejiang’s GDP and reducing the urban/rural income gap. Crucially though, there are also targets to increase the number of registered private businesses and to increase college enrolments and improve access to good healthcare. Therefore, it’s actually about encouraging more rural residents to start their own businesses and greater private sector investment, supported by top-down spending on infrastructure, education and health, from a government that has the fiscal capacity to support this spending. Radical wealth redistribution or some kind of welfare state supported by higher taxes is not on the cards. The plan does call on wealthy entrepreneurs and businesses to donate more of their wealth to society, and we have recently seen some companies responding to these calls.
To conclude, while policy news coming out of China has felt relentless at times, once regulation has caught up more with international regulatory standards, we believe the private sector in China should continue to flourish and continue to benefit from the huge growth opportunity that lies ahead.
Market rally has further to go
Talib Sheikh, Head of Strategy, Multi-Asset, discusses the outlook for financial markets, inflation and why the rebounding global economy has further to run.
There has been some volatility in financial markets as investors considered what the Delta variant of Covid-19 may mean for growth and what the Fed’s tapering of monetary support may mean. That has subsided more recently, and we are of the view that the reflation trade is stronger and more persistent than the sceptics think.
The reason is that there is a massive amount of monetary accommodation across the world, as well as a huge build-up of excess savings (in the US, excess savings are worth about $2.5 trillion, that’s 11% of GDP). We think that creates a fairly strong tailwind for consumption into the year-end.
The other thing that stops us becoming too bearish is that real yields are still at multi-year lows, and that means that markets remain relatively well supported. Every wobble in developed equity markets has been bought quickly, with markets rebounding, and with an ample level of savings, I think that pattern is likely to continue.
We’ve been looking at the outlook for emerging markets into year-end. If we see a real acceleration of the US economy and a broadening of the economic expansion, should investors consider increasing exposure to emerging markets and Asia?
The number one risk is that inflation remains more sticky than central banks feel happy with, and that this could cause the Fed to become more hawkish. We don’t see this happening, though. We think Fed tapering is nailed on to be announced in November or December, but we see conditions very supportive well into 2022. As such, we think the rally in markets can keep going for some time yet.
Time for value investors to wake up from summer nightmare
Ben Whitmore, Head of Strategy, Value Equities, examines how value investing has fared since the start of the year and why now is the time for patience.
Value investing had a very strong start to the year, however since May we have seen a huge reversal back in favour of Growth names. As a result, year to date, the Russell 1000 Growth index is almost 50 percentage points ahead of its Value equivalent.
It is important to put this recent shift to Growth in historical context. There have always been big reversals, even during Value’s greatest periods such as 2000-2003 or the early 1970’s. Looking within the markets, the best performing stocks are currently those that are the most expensive. For example, in America, more than 25% of the index is made of shares trading at over 10x sales. Evidence shows that over the long-term history of the stock market, buying companies at such expensive premiums has led to below average returns.
Valuation dispersion, a measure of the difference between the highest and lowest valued portions of the market, is currently at its 99th percentile: that is to say, markets have only ever been more stretched for one percent of the time. This is due to a mixture of macro conditions such as interest rate levels and micro factors such as structural changes within economies, the move to cloud computing, and decarbonisation. It is important to remember that value investing has always dealt with changes in industries, and we don’t think that this time is any different.
The past three months have been challenging for value investors, but we believe that now more than ever, that this is not a time to give up on the approach and investors who remain resilient and patient will be rewarded in the future.
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