For the last two decades, I have conducted grass-roots research across emerging markets. This has taken me from Brazil to Kenya, and I have convened focus groups and spoken to hundreds of consumers in many different countries. My aim is to dig deep to understand how consumer needs are evolving and how those often-underserved needs can translate into long-term investment opportunities. I look for companies which are the beneficiaries of long-term structural forces – either domestic champions or companies that are taking a growing share of global industries. It is an approach which is inherently thematic in nature, and in a way less correlated to economic cycles in emerging markets.

I have visited China often – two or three times per year while living in Singapore for the last seven years. I was excited to return to Shanghai and Hangzhou in January, where we met companies, industry experts and consumers. I have three key takeaways.

1       Challenging Economic Outlook

China’s economic recovery post Covid has been slow and uneven, and the economic outlook remains challenging. While the narrative over the last year has been focused on the economy’s disappointing performance after reopening, I think it is more pertinent to understand the changes that were occurring in the country pre-Covid and how they point to future opportunities. I believe the focus of government policy will remain on narrowing the income gap, facilitating wealth redistribution and encouraging greater self-sufficiency. Taken together, these three factors are likely to lead to moderate economic growth, a focus on lower-income sections of the population, and policy support for industries driving self-sufficiency.

2       Growth, Franchise and Governance

Our investment process uses a quality framework which looks at opportunities from the point of view of growth, franchise and governance characteristics. Following my trip, I believe the biggest change relates to the shifting composition of growth. Specifically, growth is lower and more widely dispersed across different sectors. The typical franchise remains the same, with domestic competition and overcapacity persistent, but some exporters remain highly competitive. Governance is broadly unchanged but there is a silver lining; as growth moderates, management teams’ messaging during our meetings was more focused on returns, cash-flow generation and prudent capital allocation. It will be a positive if this can point to better governance in the future.

3       China – A New Playbook

To evaluate opportunities in China, we believe it is important to understand the new playbook. While the last decade was about the wealth creation of the top 20% tier, the policy focus has now shifted to the remaining 80%. Consumers in the lower tier are more focused on value for money and, in a way, less brand-oriented versus higher-tier consumers.

In terms of sector preferences, our view is to be selective on consumer exposure, with a preference for companies that are addressing demands of lower-tier consumers. We are also focused on services taking incremental wallet share, especially in older cohorts. We are selective on industrials and focus on opportunities driven by self-sufficiency needs or global competitiveness, with the right balance of quality and price. We also see opportunities given the reallocation of savings, for example from real estate to insurance.


Liliana Castillo Dearth

Liliana Castillo Dearth

Head of emerging markets and Asia equities


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