Video: Tracking the Investment Opportunity in China | Lord Abbett
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Economic Insights

China remains a key driver of global growth. In this podcast, John Morton explores long-term investment opportunities in the world’s second-largest economy.


The Investment Conversation: Tracking the Investment Opportunity in China

Ann Hynek: While trade tensions with China remain top of mind for many investors, one expert says there are opportunities in the region if you know where to look. John Morton, lead portfolio manager for Lord Abbett's emerging market strategies, joins The Investment Conversation.

Hynek: Hi I’m Ann Hynek. And joining me today is John Morton, Lead Portfolio Manager for Lord Abbett’s emerging markets strategies. Welcome, John

Morton: Thank you Ann. Thank you for having me today

Hynek: So if we flash back a year, I remember headlines talking specifically about China deleveraging. I imagine you had a front row seat for that, considering your current position. Tell us a little bit about what that means and what you saw.

Morton: We did indeed. So a lot of the growth that's gone on in China has been in fixed investments. And those in fixed investments have required a great deal of credit being made available to the companies and to different forms of government that provide them. So, what the Chinese began to do in late 2017, early 2018 was to reorient the economy from a credit-intensive economy to a more consumption-driven economy.

And one of the ways that they did this was to start to limit the amount of credit being made available to a number of different sectors, particularly the property sector. And that deleveraging really went on until the trade tensions started. And then they needed to go back to their previous model.

This process was important for them because this really is the next stage of their development, would be to have a more consumption- driven economy. And I think that's what we will see eventually. But right now, we're in sort of a special set of circumstances that require a different set of policies.

Hynek: So John, what has deleveraging and then re-leveraging meant from an investment strategy perspective?

Morton: What's important about the Chinese economy is that it's state directed and highly bureaucratic. So, they have a National Development and Restructuring Commission. And the purpose of the commission is to really regulate the amount of debt that comes in and out of the markets. And they do this by picking very specific time windows with which they make the liquidity available.

So as a team, what we try to do is push against the wind basically in both directions. When we find that there's a large amount of yield, as we saw in 2018, you know, it became rather significant overweight in the portfolio. And at times where liquidity's being freely made available and the credit risk premium is very narrow, we tend to direct clients' capital towards other investments in Asia or elsewhere.

Hynek: So, John, if you were trying to explain to an investor just how large China is in terms of its global influence, what would you say?

Morton: I think that everything that's going on in China is historic. It has been historic since the beginning of the transformation, the late 1970s. Never in the history of the world have you had so many people brought up from poverty as what we've seen in China over the last two decades. The investment opportunities as China liberalizes its financial accounts is going to be for probably the next 20-30 years

Hynek: So, John, going just outside of China, what other emerging markets in that region are you keeping an eye on?

Morton: Well, because of the value chain in where the manufacturing is, over time we've seen a lot of manufacturing be displaced from China into other Southeast Asian markets where-- the opportunity to build a factory was-- more-- more economic and also where we saw-- wages-- were low enough that they could take advantage of them.

So the primary areas we're seeing in Asia for this to be transferred are Vietnam, Malaysia, and the Philippines. So we've seen those chains pick up and start to do a lot of the manufacturing that was traditionally done in mainland China. The Chinese encourage it 'cause they're also sourcing for the most economic place to operate.

But I'm afraid the trade frictions have really hastened that to the point where Samsung's facility in northern Vietnam produces more cellular phones than any other factory in the world. There are 60,000 employees there, and it requires 13 tons of rice a day just to feed the workforce.

Hynek: Oh my gosh.

Morton: Away from that, we have also seen the Chinese move a lot of their garment manufacturing and other textile industries to both Bangladesh and Ethiopia. And I think that that trend will continue at a very strong pace.

Hynek: So in terms of the growth that you're seeing, what are some specific infrastructure projects?

Morton: Well, at present there are 35 Chinese cities that have populations of greater than 3 million.

And we're seeing hubs being created, massive metropolises that would be serviced by the infrastructure. So in Chengdu, there's one city that they're putting together and bringing in all the cities around it.

Morton: They're also doing the same thing in Beijing and Shanghai, where Beijing and Shanghai will essentially become one city and four other cities around them will sort of form a New York City-type main city with its boroughs. The most compelling one I've found has been what they're calling the Bay of Dreams. So basically all the cities that connect Macau to Hong Kong. So there are 11 cities in all.

And they're going to turn them into one large entrepreneurial zone. And this is an extension of what they did even in the early '90s when I was following Chinese development. You know, they created these special economic zones which at that time encompassed Guangdong Province, which this by and large still is. So when they put these 11 cities together it's going to be the largest metropolis basically in the world.

Hynek: If we stick with the property topic, I know that that's something that you enjoy discussing and obviously something where you think there's a lot of value to be found from an investment perspective. Can you talk a little bit more about that?

Morton: Sure. I mean, the growth opportunity in the property sector given the migration trends is really enormous. And when you look at these companies what had gone on for a long time was it was a fairly new business and everyone was trying to build critical mass. At this point, we can identify about 50 property companies that have built the critical mass.

You need to have access to capital, and you need to have the construction companies to work with and have their labor and inputs available for you to do all this building. So that's really in a large part of what we're seeing in the property sector. When the deleveraging started taking place we were very focused on specific companies that we had followed through time to understand how they would deal with this deleveraging trend.

Hynek: Well, John, thank you so much for your time today.

Morton: Thank you for having me, Ann.

Hynek: So if the Chinese government continues to make capital available for infrastructure investing, our belief is that growth will remain steady. And, as John asserted, a key takeaway for investors is that value can be found in the property sector. More broadly, as manufacturing is outsourced to other emerging market economies such as Vietnam, this may create additional opportunity for EM investors. Thanks for joining us for this edition of The Investment Conversation.

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