Investing in China has become more challenging, due to China’s changing regulatory environment. Despite the rising complexity of Chinese investment opportunities, the country’s growing middle class and sustained innovation across the economy make these opportunities too compelling to ignore. Rather than exit China, we believe emerging market investors should look cautiously at select opportunities in sectors that support China’s priorities, which focus on “common prosperity,” among other things.
Common prosperity refers to China’s stated goals of helping the country achieve a more equitable distribution of wealth, improved living standards, and greater self-reliance in technology and healthcare. We see opportunities in three key areas China views as important to achieving these goals: life sciences, consumer brands, and electric vehicles. These areas are expected to benefit from the government’s focus on health and fitness, environmental protection, and domestic brands. Industries that are important to self-sufficiency, such as semiconductor hardware, domestic software, and cloud computing, should also continue to benefit.
Life Sciences: In recent years, China’s life sciences industry has undergone a dramatic transformation that has begun to redefine the standards of care and alter the economics of the drug research and development value chain. China was once known for generic and copycat drugs. However, our research indicates that several life sciences businesses in China are rapidly moving up the innovation curve, developing world-class therapies for both domestic and global markets. We are confident that the Chinese government will continue to support the development of its innovative life sciences industry, both to improve domestic access to medicines and to shift its economy toward high-technology services and consumption. In fact, we expect future regulatory developments to continue strengthening China’s innovative drug sector, reducing waste, and bringing the industry up to global standards. These changes should enhance the competitive advantage of leading Chinese innovators globally.
Consumer Brands: China’s sportwear brands are particularly attractive. They are poised to benefit as China tries to put more money into the hands of the middle class and to create more time for leisure activities. As part of its pursuit of common prosperity, the government is encouraging greater health and fitness. China’s hosting of the 2022 Winter Olympics should inspire more people to take up athletic activities, boosting demand for sportwear and gear. Lastly, a growing preference for domestic brands should also support locally branded products, including popular local restaurant chains and food items.
Electric Vehicles: The shift from internal combustion engines to electric vehicles (EV) is already happening, and we expect it will be one of the most defining trends of the decade. Both the Chinese government and Chinese consumers have shown strong acceptance of EVs, making China one of the world’s fastest growing EV markets, as well as the largest global producer and consumer of EVs. We expect that dominance to grow. The growth of the country’s middle class and, increased preference for domestic brands, should add to demand for models made in China.
Since the government’s push into EVs started in the early 2000s, it has shifted its focus from the production of EV components to more value-added solutions and vehicle brands, ranging from economy to premium luxury. Government, through direct subsidies and its commitment to invest in infrastructure, automation, and clean energy, has been supporting this market for almost two decades. That support has enabled the country to become the largest producer of EV batteries, earning it a place in domestic and global supply chains.
We believe selectivity is more important than ever when investing in China. Indeed, investors have faced their share of uncertainty and volatility this year. However, we think change can create new opportunities for growth investors who astutely pursue possibilities in the business spaces that are unaffected by or poised to benefit from recent regulatory action.
The views expressed are the opinion of Sands Capital Management and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. You should not assume that any investment is or will be profitable. PT# 20210222
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