China consumer markets offer growth story, says Baring’s Lee

China will continue to be an attracitve investment, despite the current slowdown, as the equity market matures and consumers are spending more than ever, says Barings Asset Management head of Asian equities HyungJin Lee.

“There can be blips along the way in the stockmarket now, but China will continue to be a large market in Asia and globally,” says Lee, who manages the £37.6m Barings Eastern Trust. “As the equity market in China matures, yields will become more important, especially in the next decade.” 

The first quarter of 2015 saw China’s lowest quarterly GDP growth for six years. GDP grew an annual 7 per cent in the first quarter, slowing from 7.3 per cent in the fourth quarter of 2014, according to China’s statistics bureau.

However, Lee says a much higher growth of 10 per cent, for example, wouldn’t be possible for the country as it creates “too much stress to the society and infrastructure”.

A slower growth environment offers more opportunities for active managers, he argues.  “From a stock selection perspective, if you are in a slow growth environment stock selection becomes more important. If you can get there first you can get superior stock growth,” he says.

For example, playing on the strong Asian consumption growth, especially due to the of big wave of Chinese tourists going overseas, he is targeting commercial airport operator Airports of Thailand in his portfolio, believing the potential for consumption at airports is “underestimated in the market”. 

“Chinese consumers are different [from Western consumers]. The Chinese tourist wants to go shopping and spend money,” he says.

French, German and British tourists that go to Thailand, which is the second most popular destination for Chinese tourists after Hong Kong, spend an average 3,500 baht per day (£67), he says, while the average Chinese traveller goes for less time but spends just over 5,000 baht per day.

Lee also thinks the Chinese markets will open up to outside investors, but it this will happen gradually.

He praises the recent opening of the Shanghai‐Hong Kong Stock Connect program and its upcoming expansion saying Chinese investors are already buying “significant amounts” in Hong Kong-listed stocks.

The MSCI index has, in fact, recently delayed the inclusion of China A-shares in its benchmarks, amid concerns about the openess and liquidity of the markets.

When MSCI does include China A-shares it is expected to do so initially at 5 per cent of the actual weighting, which research from Morgan Stanley shows will amount to passive inflows of $2bn. This will rise to $33bn when 100 per cent of the free float weights are accounted for.