Portfolio Manager Josh Rubin discusses his recent visit to China, emphasizing the need to be selective with Chinese equities as consumers regain confidence.
Emerging Markets Spotlight: China in Transition
Elle Wu
I’m Elle Wu, a client portfolio manager here at Thornburg Investment Management. I’m here today with Josh Rubin, co-PM of our emerging market equity strategy. We’re continuing our EM spotlight series, focusing today on China. So, you just spent four weeks meeting with emerging market companies, and I believe you spent two weeks in China which is your first trip back to China since COVID. Tell us what you saw and what you’ve learned since then.
Josh Rubin
That’s right. It was great to be back. It was my first trip to China since 2019 started returning to other emerging markets last year, and then China just finally reopened. So got there as quickly as possible. I think there were probably three bigger things I saw. One was the acceleration of renewable energy and electrification. The second I would probably classify as the ways in which the country is moving towards domestic substitution and the third would just be, I would say, a mix of consumer sentiment or consumer confidence around the country.
Elle Wu
Yeah. Let’s dig into that first more in terms of electrification. What is it that you saw on the ground.
Josh Rubin
I’ll tell you, it was amazing. If we go back to 2019 pre-COVID China and the rest of the world were about equal in terms of EV sales. Both had call it 5% of total new vehicle sales were electric vehicles. Today, China’s closing in on 30%. And you just see that everywhere not only in the vehicles on the road or the way the vehicles are being sold or marketed, but the scooter industry all the two wheels motorbikes have been moving to electric you know the installation of renewable energy and the pace at which they’re doing it has just accelerated. So when we think about the rest of the world, which really pause on a number of, I would say, change oriented activities or disruptive activities other maybe than e-commerce through COVID, China just kept pushing straight through in terms of renewable energy and electrification of the of the vehicle fleet.
Elle Wu
Domestic substitution has been happening for many years. But are there any examples that come to mind of things that stood out to you on this trip?
Josh Rubin
There really were. I bumped into a few types of companies doing this. And so just to be clear, what I mean by substitution is I think the earlier stages of China’s development were about Chinese companies using best-in-class global products to power their business, whether it was the back-end software systems or the manufacturing equipment, things like that.
But what we’re seeing today I visited with health care equipment companies. I visited with companies in the robotics industry and companies in the software industry. I think all of them have continued to move up the quality scale and now have products that can compete with other global best-in-class products. So, we are seeing Chinese factories installing Chinese made robots on the factory floor or using other Chinese forms of, you know, the forklifts and the hydraulics and things like that. We’re seeing Chinese hospitals really shifting away from international companies, medical devices and installing Chinese company medical devices. And then across the Chinese economy, and this is part of general modernization. But we are seeing both large companies, midsize companies, small companies adopting SAS software and adopting Chinese-made enterprise management systems rather than using, let’s say, Oracle or SAP. So overall, what we’re seeing across the Chinese economy is the evolution to real domestic best-in-class products and then Chinese companies adopting those products rather than using their international suppliers.
Elle Wu
In something that has been top of mind for many investors is consumption in China. How is consumer confidence looking?
Josh Rubin
I would say so-so. I think there’s a real balance where on one hand, Chinese consumers are excited that the economy has reopened. But the balance that we’re seeing is across a lot of forms of consumption, tourism, et cetera, traffic, sort of the volume of visitors or the volume of people going to stores. That’s come back. But actual spending has not fully come back.
And what it seems to be that we’re seeing is a little bit of just confidence after the lockdowns last year really surprised people. They don’t know if the economy is really, truly reopened and they’re being a little cautious. But secondly, something that we tend to forget is developed markets had massive stimulus through COVID to protect consumers. Emerging markets, including China, really didn’t. And so those consumers, they don’t have the extra $2,000 check in their bank accounts into them by the government. And consequently, they’re rebuilding their savings or they’re rebuilding their hours worked as the economy reopens. So, it just takes a little bit of time for their spending power to increase back to the levels. So, they want to be out and about, but they’re not necessarily spending at the same levels they were pre-COVID.
So that’s probably still something to come in the back part of this year and into next year.
Elle Wu
So would you say after this trip to China, you come back cautious, more optimistic, bullish, like what is your view of the country into the second half?
I actually came back excited to be a stock picker. And what I mean by that is there’s sometimes where countries you just want to invest in the macro or you just want to say this whole thing is a big secular theme. Just give me an exposure. And I think that’s not what China is today. What China is today is sort of much more of a rifle shot opportunity rather than a shotgun approach.
And so, coming back, being on the ground with these companies absolutely gave us another shopping list of ideas that are really very specific companies that we think can win in their industries. Win in their regions, sometimes win globally. But it’s not the same as just saying oh X is an exposure to the Chinese recovery. I think that’s not where we want to be We want to be in companies where we can really see how they very specifically can win, even if the Chinese economic acceleration is a little bit uneven from here.
Elle Wu
Thanks for those insights, Josh And now time for some rapid fire questions. So how many cities did you go to?
Josh Rubin
Six in China.
Elle Wu
How many companies did you meet?
Josh Rubin
A little over 50.
Elle Wu
How many modes of transportation did you take?
Josh Rubin
Subways, planes, buses, cars. And one motorbike.
Elle Wu
And favorite food while you’re there.
Josh Rubin
Gosh, a lot of great food. But my favorite meal was Chinese barbecue while watching the soccer game of a friend’s son.
Elle Wu
Did you get any court time yourself?
Josh Rubin
Unfortunately, the teenagers wanted to beat up on the old men.
Elle Wu
I said, well, thank you so much for your time. Really appreciate hearing from you.
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