For six months, I will be working in China.
My colleagues Ching Chang, Terry Ouyang and I have embarked on an extended research effort in China. We departed Canada on October 31st and will be spending most of the next six months living in three different Chinese cities: Hong Kong, Beijing and Shanghai.
Burgundy’s boots-on-the-ground strategy has always been vital to our investment approach. This trip is an extension of the firm’s established research commitment to China, which began around 20 years ago. We believed then, as we do now, that China’s importance extends far beyond our emerging markets portfolio. Over the last two decades, our initiatives have included management meetings and conferences, as well as tours of factories, research facilities and distribution centres. And perhaps most notably, our entire Investment Team travelled to China for an offsite meeting in 2011. During this period, we have observed tremendous growth and transformation in the country.
When we launched the emerging markets strategy a little over 10 years ago, China’s economy was about one-third of its current size and income per capita was less than half what it is today. The stock market was also much smaller and less accessible to foreign investors. Back then, investments in Chinese companies were limited mainly to those listed on stock exchanges outside of China (typically Hong Kong, Singapore or the U.S.). Any non-Chinese asset managers who wished to invest in the local or onshore A-shares market1 could only do so through the Qualified Foreign Institutional Investor (QFII) program, which was limited to 52 investors globally and capped at US$10 billion.
Today China is a country of 1.4 billion people with a US$12 trillion economy. It has the second-largest stock market in the world with approximately 4,000 companies listed across various exchanges. Investment obstacles do persist; market access remains restricted and the currency is not freely convertible. Nevertheless, the market has become more accessible. In 2008, China made up 13% of the MSCI Emerging Markets Index. Today it is 31% with domestically listed companies only partially included. With full inclusion, China’s weight would be closer to 42% of the Emerging Markets Index.
With this staggering rate of progress, we wonder what business in China might look like a decade from now. How will local innovation reverberate and affect other businesses around the world? Which companies are driving innovation and will emerge as leaders in key industries, such as the digital economy and industrial automation?
What We Hope to Achieve
We highlighted the accelerating pace of change in China at our last Client Day in May. We believe that change can happen faster in emerging markets because there is less entrenched infrastructure. This phenomenon appears to be truer in China than almost anywhere else.
For many decades, China was characterized as a follower of the West. It is time to reconsider that view. China is an innovator and creator of new business models in many sectors. It is our objective to come away with a better understanding of the country, the investment opportunities and risks. And, ultimately, an expanded portfolio of high-quality businesses.
This trip is an opportunity to go deep in our research. We will target companies that are willing and able to adapt to change, with strong leadership that builds for the future. We will also seek to strengthen and build our network of contacts in China by not only meeting with business people, but also with consultants, advisors, academics, diplomats/civil servants and journalists. These professionals will offer valuable insight for us going forward.
By living in China, we will have the opportunity to experience life there as consumers. This extended, deep-dive effort will be invaluable to the long-term success of our emerging markets strategy. These learnings will also be applicable and beneficial to our approach in other regional strategies as well. To reiterate, we believe that China matters far beyond emerging markets.
We are very excited to be immersing ourselves in the daily life and culture of this big and diverse country. By setting our boots on the ground over a six-month period, we can bring tremendous focus, gain first-hand experience and remove a layer of interpretation by others. We have gone with an open (yet critical) mind and a willingness to challenge biases. We are ready to gain new perspectives as we experience the Chinese way of life, and we look forward to sharing our findings as we keep you updated along the way.
1. A-shares are stocks of companies based in mainland China that trade on the Shanghai and Shenzhen stock exchanges. Historically, these shares could only be purchased by residents of mainland China due to foreign investment restrictions.
This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently and past performance may not be repeated. This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional information.