2017 was a good year for investors in Chinese equities, with the share price of many Chinese firms recovering after earlier falls. The Chinese economy also grew more than expected last year, which again had a positive impact on the profits of numerous companies. But the most important factor behind the share price increases is the more fundamental developments in the Chinese economy.
These developments are more important than the worrying noises being made about Chinese debt. This debt is indeed high, so the government’s policy is focused on minimising the debt burden. However, when you take a closer look at the debt issue in China, a more nuanced picture emerges.
First, our analyses show that companies in relatively new sectors have a good cash flow position. This means they can pay their debts relatively easily, which in part ensures that companies in these new sectors have little or no debt anyway. The debt issue is a topic that many media have been reporting on, but it is mainly evident at older companies and at companies operating in more traditional sectors.
Competitive strength of Chinese companies on the up
As such, it’s important to look at social and economic changes in particular. After all, these developments are seeing Chinese companies becoming increasingly competitive and businesses emerging in new sectors.
Take healthcare for instance. Income growth, a modern lifestyle and an increasingly ageing society have seen the demand for good healthcare rise. Healthcare expenses per capita are expected to reach a higher level than that of more developed economies. This economic change offers potential for long-term growth.
Our many visits to companies in China have confirmed this perception. Our experts have personally witnessed the changes and the opportunities there. Chinese companies appear successful at attracting talent, at rolling out innovative strategies and developing competitive products.
We were recently guests at a Chinese pharmaceutical developer, where we were introduced to the world-class scientists who have joined the company. These experts previously worked for world-famous pharmaceutical companies, and this suggests that Chinese companies may stand alongside major international pharmaceutical firms in due course.
Opportunities for equity investors
Another important factor for investors is the improvement in corporate governance in China. We’ve seen that the quality of governance at listed companies has improved over the past few years. This, too, raises the outlook for better company performance. As such, the above developments mean there are investment opportunities in China in 2018 as well.
All in all, we are positive about the outlook for the Chinese equity market in 2018, especially for ’new economy‘ sectors such as healthcare, IT and insurance. Investors can have faith in the future because a changing China is offering considerable growth opportunities.