AB IQ INSTITUTIONAL INSIGHTS
AUTHOR China’s Leapfroggers Sammy Suzuki John Lin Stuart Rae Shape the Investing Brad Gibson Landscape
In our many travels through China to explore the changing market CONSUMPTION: CHINESE CONSUMERS COME landscape, we’ve discovered countless companies and industries WITHOUT THE BAGGAGE that are jumping ahead of the West. These leapfroggers are creating CLICKS VS. BRICKS exciting opportunities for investors as China’s equity and debt markets Mobile trends are at the heart of China’s technological prowess. open to the world. China’s landline telephony infrastructure never developed as much as that in the US or Europe. Yet mobile phone penetration in China Global investors are starting to gain access to trillions of dollars’ worth has almost caught up with that in the West. Meanwhile, brick-and- of new securities in China. In June, index provider MSCI began to mortar retail is very underdeveloped in China. This difference in include domestic Chinese stocks, known as A-shares, in its emerg- infrastructure is the source of China’s edge. ing-market indices for the first time. Chinese authorities are adding For developed countries, the shift to e-commerce is often painful. capacity to trading programs that allow international investors to buy It requires the retail sector to unwind huge networks of stores and onshore stocks, which have an aggregate market cap of approximately strike the right balance between physical and digital sales. For US$7.0 trillion. And next April, Chinese government bonds will be China, it’s much easier, since companies don’t have to dismantle added to the Bloomberg Barclays Global Aggregate Bond Index, nearly as much physical store space to take the digital leap. For a move that could shift an estimated US$300 billion in allocations example, the Alibaba Group has been building out its Hema to China’s fixed-income markets once other index providers follow supermarket chain, in which the stores are optimized for online Bloomberg Barclays’s lead. Foreign investor inflows into China’s bond delivery. In contrast, Amazon recently purchased Whole Foods market are already exceeding US$7 billion per month this year. Market and will likely need to retrofit the stores meaningfully.
For international investors, the appeal isn’t just about the sheer size of What’s really going on here? Instead of reconfiguring brick-and- China’s market. The Chinese equity and bond markets add significant mortar infrastructures, Chinese companies can spend their time diversification benefits to global funds. And Chinese companies are building efficient e-commerce platforms designed for a digital leading the way for global peers in industries ranging from e-commerce world. As a result, Chinese e-commerce now accounts for about to advertising and electric cars to clean energy. Investors who can 15% of retail sales, nearly as much as in the UK and well ahead find the strongest candidates stand to benefit from powerful return of the US (Display 1, left). Given the vast size of the market, this potential at a time when equity markets in the developed world may translates into massive consumer power. Alibaba reported annual lose steam. gross merchandise value of US$768 billion in its fiscal year ending March 2018—more than three times greater than Amazon’s over
the same period.
AB IQ | INSTITUTIONAL INSIGHTS | JUNE 2018 D 1: C I A D R M P
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