PROFITING FROM CHANGE
Some things not only change all the time, but they change fast. And there are many things that can change fast – the weather, my mood or even the amount of ice cream in my freezer.
On a more serious note, progress and innovation over the past 30 years alone have changed the world in countless ways. The last 3 decades have been marked by changes in technology, politics and global demographics.
And in the next decade, we see a few megatrends that could impact the way we invest:
- Shifting of power to the East from the West
- Technological revolution
- Change in the world’s monetary policy and situation
- An ageing population globally
Whether I like it or not, I stand to lose if I do not embrace these changes. So I would want to know where the opportunities are to invest and when is the best time to get in (or out).
Unicorn invited a panel of experts to sit down with a selected group of clients recently for a conversation on 2 of the megatrends. The discussion centred specifically around China and the tech sector – two areas that we believe the smart money is going in the next few years. We wanted to make sense of the progress in these 2 sectors and learn how to profit from them. I find it necessary to highlight some takeaways and lessons that I garnered from what is now the 3rd edition of our Unicorn Intelligent Investing Services (UIIS) dialogue.
China: The Early Years
Investing in China had paid dividends for Unicorn and our clients since 2008. We have been able to ride on the back of China as the world’s factory, as Beijing relied on some facets of the old economy such as manufacturing to achieve 3 decades of high-speed growth. Fixed investment and exports were also a mainstay of the ‘old model’.
However, China is embarking on a ‘new normal’ under the leadership of President Xi Jinping. This is his bid to deliver the ‘Chinese Dream’ of China as a global power with a new economic model that requires more attention to qualitative and sustainable growth rather than just maximising growth rates. This approach would allow China to transform into a consumption, services and innovation powerhouse, while avoiding some of the ‘baggage’ that beset other nations which took similar paths.
This makes investing in China potentially tricky as it is not a homogeneous economy. This is because China will not be able to fully shed its skin as there would still be remnants of the ‘old model’ during this transformation. But we believe it would be worthwhile to navigate through this sea change, as we are confident that we are on to something, given what we have seen in the country of late. There are signs that the transition is going according to plan.
China: The Morphing Dragon
The country’s 2017 GDP numbers showed that continued strong public infrastructure investment, solid consumption growth and improving foreign demand have led the way. The services sector also accounts for more than half of China’s GDP now (51.6% compared to 33% for the industry sector).1
Manufacturing in China’s eastern cities are also moving up the value chain. High-tech industries grew by an average of between 9% and 59% since 2015.1
And this is despite the economic slow-down. Traditional manufacturing is moving inland instead, as are the country’s share of foreign direct investments and investments in general.1 Per capital GDP is also rebalancing in favour of the central and western regions.1 As for total exports, high-tech and high value-added products account for about 30% and 50% respectively.1
China is now also home to the largest e-commerce market (online retail sales exceeded RMB 5.2 trillion in 2017) thanks to surging internet users and penetration rates.1
Throw in the fact that it is probably the first country in the world that has ‘bypassed’ the credit card stage in the development of a country’s financial system for good measure. The majority of Chinese upgraded from making transactions with cash straight to e-payment with the use of Alipay and WeChat, skipping the ‘credit card age’ completely. This is proof that China can be the innovative powerhouse that it envisages which has boosted the fortunes of its local tech companies like Alibaba and Tencent.
The red dragon has definitely changed drastically since former president Deng Xiaoping opened China to the world in the 1980s.
China: Rich Pickings?
When investing in China, you need to be selective and only buy into the country’s ‘sectors of tomorrow’. These could include its consumption, services, healthcare and technology sectors. This view is supported by an expanding ‘middle class’ (60% of the urban population by 2025) in the Middle Kingdom.1 This group should continue to drive consumption and the need for more services. We are already seeing this trend with overseas spending by the Chinese increasing in recent years. They now account for over 20% of global outbound tourism –- twice as much as that of the Americans.1
China’s population is ageing too. The over-65s will account for 24% of the population by year 2050 from 7% in year 2000.2 This should increase demand for healthcare and insurance services. Grabbing opportunities here in a timely fashion could reap rewards.
The Rising Tide of Tech Change
To say that technology has changed the world in just a few short years is an understatement. Consider the way it has affected our personal lives, for example; in 1990, the internet was a pipe dream – something that existed primarily in schools and the military. Ten years later, in 2000, the internet was everywhere and people accessed it in their homes via their desktop computers.
Today, over 40% of the world’s population is online – that’s 3.5 billion people.3 More notably, people’s primary means of accessing the web is via the small-yet-powerful smartphone so many carry around with them in their pockets all day long.
Social media is also one of the most influential applications of the internet today. About two-thirds of all Americans and Singaporeans are on Facebook, the most popular social media platform currently.4 In 3 years, social media users on various platforms around the world could jump to 3 billion.5 That’s a far cry from how things were 20 years ago, when the closest thing there was to modern-day social media was Friendster and AOL Instant Messenger.
But if you think that only our personal lives are changing because of technology – think again – it’s also rapidly changing the way things get done in the world of business, all thanks to automation. Tech has reached a point where a massive amount of work currently done by humans will soon be done by computers.
A study conducted by Oxford University in the UK found that roughly 47% of the jobs in the US could potentially be replaced by automation over the next 20 years.3 This is not to say that 47% of the population will soon be out of job. As these jobs disappear, new ones will be created in their place.
Buying Into Tech
The panel suggests that you look at companies in the software development front. With the ability to make sense of large amounts of data and predict the appropriate outcome accurately, artificial intelligence and machine learning will drive automation.
Companies which have access to large amounts of data are also recommended. For artificial intelligence to work, developers and machines both need data – the more the merrier. For now, the big boys (such as Google, Amazon, Alibaba, Tencent) could be the ones with a stranglehold on data. At the right price, they could also be worth looking at.
We have stuck steadfastly to our decision to hold sizeable amounts of cash and gold in your portfolio over the last 2-3 years. While it may seem that we are averse to change by staying on the sidelines, we have always maintained that our inaction should not be mistaken for indifference.
We believe we are at the tail-end of a bull market and are researching tirelessly to ensure we can buy into the right asset classes and sectors when the party ends. We believe we have uncovered some gems while being assured that our position in China is on the right track.
All that is required is a market correction. From history, investing in the right sectors during bearish times often result in at least a doubling of profits after the market rebounds.
One thing is for sure: change is the only constant. It’s natural that one may be overwhelmed in the face of change, as it could be extremely unsettling. And to many, a market correction – or even a crash – can cause great emotional upset.
This will be the time you seek solace in your Unicorn consultant. We will be your guiding hand and help you take advantage of the market downturn then.
1 – BNP Paribas Asset Management
China Handbook: Understanding Investment Opportunities in Chinese Equities
2 – UN, World Bank, OECD, IMF
3 – How Technology is Rapidly Changing the Way Things Get Done Across Industries
4 – Facebook Penetration Rate Data for All Countries
5 – 11 Dramatic Ways the World Has Changed In the Last 20 Years Alone
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