Virginie Maisonneuve (pictured), Allianz Global Investors’ global CIO equity, is confident on the long-term outlook for China despite ongoing volatility in a “shifting world order”.
Investor concerns have been raised over the threat of EU and US tariffs on Chinese goods and their impact on the electric vehicle (EV) sector.
China has invested heavily in the sector in recent years, and represents 60% of global plug-in vehicle sales, ahead of Europe and the US.
Maisonneuve says that, as China has historically been the fastest-growing emitter, developing its EV industry is a logical move in order to lower its carbon footprint through evolving transportation.
“At the planet level, we cannot combat climate change without China. We cannot win over climate without winning over transportation,” she tells Portfolio Adviser.
“The world needs EVs. China can make cheap EVs, and on a global basis we need cheap EVs. However, while this is the case, the current situation shows that priorities might have shifted in the past few years.”
With China dominating the market, the US and Europe have sought to protect their own industries by exploring placing further tariffs on Chinese EVs.
Maisonneuve says: “It’s not that climate is less of an issue. While climate is still a critical topic, the share of European and US contribution to global carbon emission has declined and the shifting perspective from Europe and the US, as it relates to imported EVs from China, might include the fact that the automobile industry in Europe is a significant employer. A strong Chinese competition in the field could disrupt European job markets.”
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She also points to the different stances from members of the EU on imposing tariffs. While France and the majority of the European Union has voted for tariffs in principle, Germany opted to abstain from a recent vote on the matter. The German automobile sector is an important exporter, and therefore tariff retaliation could have a larger impact on its economy than for other European countries.
“Interestingly, at the heart of core Europe you have different perspectives on that global policy. But, let’s remember an important aspect, which is that we cannot solve climate without solving transport and China.
“Would I want to own a quality Chinese EV if it’s available and at the right price? Absolutely. Even with 20% tariffs, China would find ways to adjust its business model given its large capacity available in the sector.
“In a protectionist context, we will also most likely see a higher number of collaborative projects or joint ventures with Chinese companies in Europe.”
Under-owned
The IA China/Greater China sector was the worst-performing peer group in 2023, according to FE Fundinfo data, with the average fund in the sector falling 20.4%. Meanwhile, the MSCI China index has dropped over 36% in the three years to 25 July.
This underperformance led several commentators to suggest China was becoming ‘uninvestable’, while foreign investors have increasingly reduced their exposure to the country, instead allocating to other regions within emerging markets such as India.
Maisonneuve, however, is adamant that there is still a place for China in global portfolios.
“You have a market that’s very cheap, and that everybody has basically forgotten. As the election campaigns intensify in the US, we should expect a lot of noise around the topics of trade, technology and China. Markets move with facts, of course, but also with the anticipation of facts. My view is that there is room in a global portfolio for some China exposure.”
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While the MSCI China index partly rebounded in the opening half of 2024, rising 16% by mid-May, it is currently only up 1.8% for the year to date.
“China should be seen as an asset class on its own,” Maisonneuve adds. “Part of the market now is more dividend paying, and you also have innovation in tech, given what’s happening in terms of the bifurcation of global technology standards.
“Some of the areas we find interesting in China in the innovation area are healthtech and infratech, as well as AI.”
Over the longer term, Maisonneuve adds that the potential for shifting dynamics in China’s population’s savings is important to monitor, especially in a rapidly ageing society. Over time, savings are likely to be diversified away from the embattled property sector and towards stocks and bonds, which could provide further relief for the market.
“The majority of the domestic equity market is owned by domestic investors. Clearly, domestic households and investors have been impacted by property. I believe a large part of the property adjustment has taken place. That is not to say that the property market is going to rebound sharply, but all it needs is stabilisation to help with consumer confidence.
“With the concept of ‘common prosperity’ as one of the key pillars of China, it would seem logical to expect that over the long term, some level of pension reform could also be expected. This would also underpin flows into domestic capital markets.”
