As US Election Day approaches, investors are anxious about increased capital gains tax, more regulations, and a weaker dollar. Looking round the world today, it is clear that economic growth is strongest in China, and its neighbors, South Korea and Taiwan. We have 72% of our funds invested in these 3 markets, mainly in the technology sector. The winners from the US/China trade war are Taiwan, South Korea, and (to a lesser extent) Vietnam, which is benefiting from a transfer of manufacturing, but is difficult to invest in and still has some high foreign premiums.
Taiwan Semiconductor and Samsung Electronics are the two big winners: and there are a dozen smaller names supplying cloud services, electric vehicle batteries, semiconductor equipment, and other key areas of on-line services and products (MediaTek, UMC, Delta Electronics in Taiwan, SK Hynix, Samsung SDI, and Samsung SDS in South Korea). Our assumption must be that the Covid 19 Pandemic will continue to paralyze world trade and tourism for up to another 12 months – and South East Asia, in particular, will suffer from this cessation of activity, although there are some promising signs this week of a more immediate “opening up” in Southeast Asia and Australia. China and India are both large domestic consumer economies, which will continue to exhibit robust consumer spending and corporate earnings growth.
President Xi Jinping made a visit 2 weeks ago to Shenzhen, echoing the famous “Southern Tour” of Deng Xiao Ping in January 1992 (the month our company, Lloyd George Management, was founded in Hong Kong) when he said “To Get Rich is Glorious!” and fired the starting gun for capitalism in China. This time, Xi was urging young Hong Kong entrepreneurs to consider Shenzhen (no political problems), which is, indeed, a technology hub (Tencent, HuaWei, etc.) with nearly 20 million inhabitants and low taxes. In addition, there is strong government support for the “Greater Bay” Area of Hong Kong, Shenzhen, Guangzhou, and Macau around the Pearl River, with its excellent infrastructure, and nearly 100 million middle-class population.
This is not, in our view, the end of Hong Kong which has, this year, seen 20 I.P.O.s totaling US $15 billion (and, in China, more than $47.5 billion); and ANT Financial will follow On November 4th, with an estimated US$34.5 billion (the largest ever I.P.O. anywhere). The Hong Kong / Shanghai and Shenzhen “connect” means that the Hong Kong Stock Exchange still performs a vital role for China in raising international capital, while maintaining a closed capital account.
It is worth highlighting that Taiwan, of all the free democracies, has not only performed best against Covid 19 (only 540 cases, 7 deaths) but also has the best performing stock market. Export growth has also begun to recover last month (9.4%). Forecasts for the tech sector in Taiwan are for nearly 30% average earnings growth, on a PE of 17 times. That is why we include Taiwan’s tech names in our call to “Hedge Biden” by investing in Chinese technology.
There is also the threat of “Trust Busting” against Facebook, Amazon, Google, and Apple. This does not apply to Alibaba, Tencent, Baidu and the Chinese tech sector. We expect these names will outperform in the coming year (revenues and profits up over 30%).
Also in India, we have been pleasantly surprised by the strong sales and earnings growth announced by Tata Consultancy Services and Infosys, the 2 leading Indian software groups (almost 20% gain in EPS) as well as HCL and smaller names. India, despite its large number of virus cases, is coming back strong. The death rate for Covid is less than half of what it has been in the UK and the USA. 95% of cases recover quickly.
The other reason to hedge a Democratic sweep in the November election is an easing of US / China trade tensions, which would, in our view, bring a strong rally in Chinese A Shares.
China’s economy registered 4.9% growth in the 3rd quarter, so the year 2020 may turn out positive at around 3% annual growth — the only major economy to have grown this year. The Yuan, or Renminbi, should be 10% higher against the US dollar, seen against these figures (but is held down by the PBOC).
There has been a remarkable growth in international capital flows into China’s capital markets, both bonds ($370 Bn.) and stocks ($230 Bn.), as China has eased restrictions on foreign ownership of brokers, fund managers, insurance companies, and banks. Most major US and European financial groups are now represented in Shanghai.
Normally, all this would lead to a much stronger Renminbi, now at 6.68 to the US dollar, compared to 7.18 a year ago. We believe the RMB is 10% undervalued and may see a further rise in 2021.
In an historical perspective, it may not matter too greatly who wins the election, since the economic and demographic future is reasonably predictable. The Covid 19 Pandemic has accelerated existing trends – the shift of economic gravity from the US to China, for example – but also the policy response of governments, especially in the US and Europe, to print massive reflationary packages of financial relief, which will mark the end of the 40-year deflationary trend, since Volcker in 1980. We, therefore, expect a dollar and debt crisis, within 2 years (whoever is in power in Washington), which will impact the current US bull market. Nevertheless, we maintain our view that in 2021, Asia — and especially the favoured technology stocks — will outperform.
Robert Lloyd George
1 November 2020