China’s economy has got off to a good start this year with the latest official figures slightly ahead of expectations. The world’s second largest economy grew by an annualised rate of 6.4% in the first quarter of this year, the same pace of growth as the last three months of 2018, but behind the 6.8% figure posted this time last year.
Tax cuts to stimulate the economy, a jump in industrial production growth to 8.5% - its fastest pace in more than four and a half years - and Donald Trump’s decision not to raise tariffs in March, have all helped lift the Chinese economy.
However Beijing is forecasting slower growth this year than previous years of between 6% and 6.5%, so while the figure provides some comfort for investors, the pace of growth is still relatively weak and near to a 30-year low.
As China moves away from being the factory of the world to focus more on its own consumer economy, it’s likely the transition will have some bumps along the way. A slowdown in retail sales, a declining auto market and ongoing trade tensions have led investors to be cautious on the country’s prospects. However for the discerning stock picker, willing to take a long-term view, opportunities are still out there.
With China continuing its focus on developing the domestic economy, the growth of its consumer market will be closely watched by many investors. According to the Economist Intelligence Unit, China will become a middle-class society by 2030, based on income measures. Currently around 40% of the population is classified as low-income. By 2030 that figure is likely to drop to 11% and, around 75% of the 1.4 billion population will be considered middle-income.
This growing middle-class is especially attractive to Western retailers with consumer-focused brands. Luxury international brands such as Burberry and LVMH are already tapping into this demand. But what might have escaped some investors is the growing trend of Chinese consumers to switch to more local brands.
Dale Nicholls, manager of the Fidelity China Special Situations PLC investment trust has noticed this trend and is investing accordingly. In his latest viewpoint he notes “Chinese brands now take up 30 of the top 50 brands, a massive increase from 2016 where the number was just 18. The likes of Apple, BMW and IKEA have been replaced by Huawai, Taobao and Meituan Dianping.”
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As Apple are learning the hard way, price and value for money cannot be overlooked in the country as local brands such as Huawei offer similar products at more attractive prices.
One area of focus for the China Special Situations trust is the sportswear market which is expected to see double digit growth over the next few years. On the premium end of the market Nike and Adidas continue to hold impressive market shares.
However looking at the mass market level, local brands such as Li-Ning are leading the way. Founded by a former Chinese Olympic gymnast, the company has created a brand that appeals to a broad audience with reference to Chinese heritage and characters.
For investors, the growth and changing face of the Chinese consumer offers many opportunities. Investing in a fund that focuses on companies in the region is an easy way to access this potential.
By choosing a fund you can delegate the research to an expert in the region able to identify and see first-hand how the market is evolving. When it comes to consumer trends, often the clues are there right in front of you. An observant investor based on the ground can see what people are wearing or talking about long before it is reported in a company’s sales figures.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.