Investors who are put off investing in China due to concerns about the ongoing trade tensions with the US risk missing out on a growth opportunity that’s “too big to miss”, according to Mike Bell, global market strategist at JP Morgan Asset Management.
The trade war was one of the main features of Donald Trump’s presidency and his departure from the White House has led to hopes of a thawing in relations between China and the US.
Bell said that the more measured approach that is likely to be taken by the new administration will be beneficial in terms of predictability.
“Investors are probably willing to pay a slightly higher valuation on the basis that you’ve got this reduced uncertainty and reduced volatility that can just be sparked at any moment,” he said.
However, some fund managers believe tensions are likely to be a feature of the relationship between the US and China for many years to come.
And Bell said that while investors no longer have to monitor “2am tweets from the president and worry about what that will do to the stock market”, the change in president hasn’t solved the underlying reasons for the dispute.
“China’s rising share of global GDP puts it on a course of constant friction with the US over the next 10 and probably over the next 30 years,” he explained.
“You will see continued tension around intellectual property, for example. Another thing you may see, particularly under the Biden administration, is more of a focus on the ESG [environment, social & governance] side of things from China, because he obviously wants to accelerate the US towards a more climate friendly world.
“But that’s obviously no good if it is importing lots of goods from China in a way that is less ESG-friendly, so he may look to level the playing field.”
Yet while most headlines about China since the US election have focused on the impact of a new president, Bell warned that investors who focus too much on politics risk missing the bigger picture.
The strategist said the case for investing in China still rests on its demographics, and while these do not look as powerful as they did 10 years ago, they should still provide enough of a tailwind to accelerate ahead of the developed world in the medium to long term.
For example, he pointed out China’s GDP is expected to grow at an annualised rate of 4.4 per cent over the next decade, more than twice as fast as the 1.8 per cent from the US.
“That’s pretty incredible, because if you think about compound rates, that means that by 2030, China’s economy should be more than 50 per cent larger than it is today,” said Bell.
“People think of China as being a very rich economy, and in many ways, it is. It already makes up a large share of global luxury goods demand.
“But the biggest story in China really is what we’ve seen over the last 30 years. As people have moved out of the countryside and into the cities, that has come with a rise in incomes.”
Source: JP Morgan
He continued: “You can see the incomes are still far below where they are on average in most developed economies. But with that 50 per cent-plus growth expected over the next 10 years, we’re talking about a world where income per capita rises from in the region of $10,000 per person to around $15,000 per person by 2030.
“Now that may not sound like a lot, certainly compared with the US where incomes per person are expected to be around $60,000 in 2030. It will still be some way lower.
“But if you go from around $10,000 per person to around $15,000 per person on average and multiply that by 1.4 billion people, it gives you an idea of the size of the increase in consumption and the size of the opportunity.”
Another important development in China over the past quarter of a century has been the rise of the middle class. There was a negligible number of people in this bracket in 1995, but it now encompasses about 40 per cent of China’s population. This is expected to rise to 70 per cent in 2030, a figure that Bell said is vital for investors.
“To put that in some context, we’re talking about an increase of about 450 million people in the next 10 years,” he explained.
“That will shift from the level of income which makes it hard to consume much from a product perspective to a world where they are able to go out and buy more of the goods and services that companies need to invest in and provide.
“We think that is the most exciting growth opportunity in the world over the next 10 years, that rising income for over 18 per cent of the population, lifting their ability to spend and lifting the opportunity therefore for investors to tap into.
“But if you focus on the politics, you’re going to end up missing out on this growth opportunity that frankly is just too big to miss.”