China: outside the spotlight

China offers overlooked growth and diversification opportunities because investor attention is concentrated on Taiwan and Korea while Chinese companies retain strong technology, manufacturing and consumer franchises.

• Taiwan and Korea are heavily exposed to information technology, which represents around 70% of Korea’s and 90% of Taiwan’s equity indices, versus around 20% of MSCI China All Shares.
• The weak property market’s negative wealth effect may be easing: a 10% fall in property prices now implies a CN¥25tn loss, compared with nearly CN¥40tn five years ago, while equities and the real economy could generate a combined positive wealth effect of roughly CN¥27tn this year.
• Appliance and electronics trade-in programmes are already supporting household spending, while Midea’s industrial division contributes more than a quarter of revenue and is growing at around 20% annually.
• Midea trades at around 12x earnings, compounds free cash flow at 10% annually and pays dividends equivalent to a further 4% annually; its businesses include Kuka robotics, factory automation, data-centre cooling and commercial heat pumps.
• China has US$23tn of excess household savings in low-returning bank deposits, so even a small shift into equities could materially affect a domestic equity market around half that size.

Takeaway: Investors should examine China selectively rather than make a broad call, because property weakness, cautious policy, geopolitics, overcapacity and persistently low valuations remain risks; nevertheless, Baillie Gifford sees more opportunities than in several years for both returns and portfolio diversification.