Markets and Economy Higher earnings visibility and growth offered by domestic sectors
China’s domestic sector has grown significantly and now constitutes a dominant share of GDP.
2 May 2021
Article
A focus on private enterprises
2 May 2021
Our investment strategy favours private enterprises. They are highly competitive and innovative, constantly utilising new technologies to deliver market leading products and services. We are positive about their growth as they continue to improve efficiency and productivity. From a corporate governance perspective, we believe that the interests of private enterprises are more aligned with our interests, as investors.
A private company that is moving online to stay relevant to customers
A good example that showcases private enterprises’ agility is a long term holding in a hypermarket whose management reacts timely to capitalise on opportunities within its online operations. Following an investment by a leading e-commerce platform (late 2017), the company began a digital transformation that ensured that during Covid-19, the company achieved stable revenue thanks to its rising online presence. Meanwhile, we saw similar investment by this e-commerce platform in state-owned enterprises (SOEs) and changes in these businesses are generally not as fast.
Private enterprises are managed in line with investors’ interests unlike many SOEs
In our view, private enterprises are more likely to manage their businesses in the interest of shareholders, and in doing so, take corporate governance seriously. Within our bottom-up stock selection process, we attach a high level of importance to ESG factors.*
Our view has been reflected in our lack of exposure to a leading liquor producer in China. Although the company has achieved strong earnings growth, we were concerned about its corporate governance. The company is indirectly owned by the local government and there have been several high-profile cases that involved senior managers being removed from their posts by the local watchdog. We believe a lack of transparency in distributor selection is an issue for the company.
Conclusion
In conclusion, we are positive towards the domestic economy. We like the rising digital trend that is being accelerated by the recent outbreak of Covid-19 and favour private enterprises thanks to their agility and sound corporate governance. We are positioning the Invesco China Equity Fund (UK) to capitalise on our views.
We believe it is important for investors to adopt an all-share approach to capture the best opportunities in China. We define this as searching for the best investment ideas across all of China’s share classes irrespective of listing locations. We believe offshore equity markets offer many opportunities with growth potential, particularly among the consumer, services and technology companies. These are mostly large private enterprises, which are listed offshore due to their entrepreneurship and financial strengths. In addition, we see an increasing number of opportunities within the onshore market as it continues to mature, particularly in the consumer and healthcare sectors.
* Whilst the fund manager considers ESG aspects they are not bound by any specific ESG criteria and have the flexibility to invest across the ESG spectrum from best to worst in class.
Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested. The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk. Although the fund does not actively pursue a concentrated portfolio, it may have a concentrated number of holdings on occasions. Accordingly, the fund may carry a higher degree of risk than a fund which invests in a broader range of companies or takes smaller positions in a relatively large number of holdings. The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
Important information
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All data is as at 31/08/2020 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
For more information on our funds and the relevant risks, please refer to the share class-specific Key Investor Information Documents (available in local language), the Annual or Interim Reports , the Prospectus, and constituent documents, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements.
