22 BARRON’S November 22, 2021
The impact will be much more
localized to companies that sell into
China because consumers in Europe
and the U.S. are coming out [of the
pandemic] in very good shape. In our
global portfolio, we’re cautious about
anything very exposed to China. Lux-
ury goods would be an obvious exam-
ple, as the conspicuous consumption
of goods could be targeted by the com-
mon prosperity push. We’re in the
early stages of that.
Moreno:India stands out as a
country immune to China’s slowing
growth. We likeZomato[543320.In-
dia], India’s leading online food-
delivery company. India has very low
penetration, with only about 8% of
food consumption from restaurants,
compared with 40% in the U.S. and
China. India’s food-delivery market
hasanattractivestructure,withmar-
ket share consolidated in two players.
That results in a rational pricing envi-
ronment, so unit economics have
shown solid improvement.
Considering today’s discussion,
especially of a secular slowdown in
economic growth and lower profit-
ability for Chinese companies, why
should investors allocate money to
China?
Chwang:It always makes the most
sense to buy China during a period of
confusion and uncertainty, especially
when the earnings stream is going to
be changing for the better. It is going
to be less cyclical and higher-quality,
as more corporate earnings streams
will be driven by consumption- and
services-led industries. There will be
more inclusion of knowledge-based
sectors, such as information technol-
ogy and healthcare, within the Chi-
nese equity universe.
Also, for every part of the economy
undergoing restrictions, there are
parts the government is trying to sup-
port, like renewables and domestic
production of certain types of prod-
ucts, such as semiconductors, medical
devices, and even specialty chemicals.
Moreno:We are still seeing pockets of
growth, but the types of companies
that will survive and thrive are going
to be different because of the overarch-
ing regulatory theme, and near-term
pressures such as the impact of the
deleveraging of the real estate sector.
Jain:Relative to a year or two ago,
[exposure to China] is probably
lower, because a lot is in flux. Look
at earnings revisions and they’ll tell
you the story. The relative growth is
improving elsewhere. But, yes, peo-
ple should allocate to China. The
issue is the change within China.
How have you been picking your
spots differently within China?
Chwang:The MSCI China index is
down about 13% this year in U.S. dol-
lars, but the MSCI China A index
[composed of shares listed on the
Shanghai and Shenzhen exchanges] is
up 2% U.S. The Hang Seng index of
Chinese shares listed in Hong Kong
has fallen 7%, and U.S.-listed China
shares are down even more. The
A shares now trade at around a 45%
premium to the H shares, a reflection
of the difference in foreign versus lo-
cal perception.
Longer term, there is upside for
Hong Kong–listed stocks. China is
allowing domestic investors to invest
in Hong Kong, but it is still quite a
high hurdle because they have to be
high-net-worth investors. If China
were to lower that bar to encourage
more retail participation, there poten-
tially would be a benefit from a valua-
tion standpoint.
Moreno:The types of companies that
will thrive are those more aligned
with what the government needs or
is focused on—for example, green
energy. The internet sector is one to
stay away from.
Internet stocks, such as Alibaba,
have been badly beaten up. Are
they pricing in the risks?
Moreno:The regulation just hit the
real world last month, so now we have
“In our
global
portfolio,
we’re
cautious
about
anything
very
exposed
to China.
Luxury
goods
would be
an obvious
example.”
Rajiv JainRajiv Jain
Co-founder, chairman, and CIO, GQG Partners
Company / Ticker Recent Price Market Value (bil) Forward P/E
Meituan/ 3690.Hong Kong HK$292.60 $230.5 NM
Alibaba Group Holding/BABA $161.58 460.1 17
LAM Research/LRCX $630.63 89.3 18
Tokyo Electron/ 8035.Japan JPY60,950 82.8 22
ASML Holding/ ASML $859.46 351.4 45
PetroChina/PTR $46.20 130.8 6
Forward P/E for next 12 months. NM=not meaningful. Source: FactSetto see how companies are impacted—
and that will vary from company
to company. Earnings revisions have
been coming down, but we don’t think
enough to reflect the new reality. Hence,
multiples are still too optimistic.
Green:The government is classify-
ing [the large internet companies] as
critical information infrastructure
providers. They are such an impor-
tant part of daily life in China that
they’re going to be regulated in accor- Photograph by Alfonso Duran