The visit of the Chinese Premier to the UK has thrust the world’s second-largest economy into the headlines. Clearly, the trade deals signed between the UK and China which are estimated to amount to over £30bn have split opinion, but for investors it seems to make sense to buy companies which are operating in the Far East.
That’s because China offers unrivalled growth potential. Certainly, the days of double-digit GDP growth may not return for some time (or at all), but even with growth of around 7% per annum, its economy is increasing in size at more than twice the rate of the US economy. Therefore, investing in stocks which operate within the booming Asian economy could lead to much higher rates of growth than would be achieved if investors concentrated on domestically-focused stocks.
Of particular appeal are consumer goods stocks. That’s because the Chinese economy is undergoing a transition away from being led by capital expenditure on infrastructure projects and towards being much more reliant upon consumer expenditure. And, with the Chinese population increasing and becoming wealthier, demand for products such as premium beverages, electronic goods and other consumer items is set to soar. In fact, with 44% of China’s 1bn+ population due to be defined as ‘middle class’ by 2020 (up from around 28% this year), it is clear that the outlook for consumer goods sales is hugely encouraging.
Furthermore, as the last couple of decades have shown, branded goods are particularly popular in China. In other words, while demand for consumer goods in general is likely to soar due to the aforementioned increase in wealth and the rise of the middle classes, Chinese demand for specific, branded goods is likely to represent a significant proportion of this growth. And, with there being a relatively small number of companies which own the major brands in areas such as beverages, electronics, health care and other spaces, those companies could be set to benefit hugely from increasing growth.
So, for example, Diageo owns multiple premium spirits brands, while Unilever has a wide range of food and consumer products. These two companies are well-positioned to benefit from increasing Chinese demand alongside a number of others, although their number is perhaps smaller than many investors currently realise. Therefore, they have scarcity value.
Of course, Chinese growth is not going to be a smooth ride. Just like any other economy which has posted rapid growth in history, there will inevitably be bumps in the road. That is especially the case during this transitional period and, while the recent concerns surrounding China’s long term future are understandable as the country’s GDP growth rate comes under pressure, they present an opportunity for long term investors to buy in at even more appealing valuations.
The move from capital expenditure-led to a more consumer-focused economy does, meanwhile, call into question the future of resources companies. They have been hard hit by reduced demand for a range of commodities, but appear to have sound futures as a result of increasing demand for energy across the globe. In fact, energy demand is due to rise by 30% in the next two decades, with fossil fuels likely to retain a dominant position over renewables. So, while miners and oil companies are in the doldrums, they still offer strong growth potential in the long run.
Clearly, the future is a known unknown and there are no guarantees that China will deliver on its considerable potential. However, the risk/reward ratio appears to be very favourable and, by buying Asia-focused shares now, it seems probable that retirement will be a more prosperous period than would otherwise be the case.
