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As China enters a new year it is fitting to draw a comparison with this year’s zodiac animal, the dragon. Undoubtedly, the Chinese economy could do with a bit of luck and strength, attributes associated with the dragon. However, the key question remains: will the market heat up or will investors just get burnt?

Rewind one year and investors were projecting a strong recovery in China given a long-awaited farewell to its zero-Covid policy. This optimism was short lived. The rally in China’s stock market quickly tailed off as structural problems became alarmingly apparent. Deep-seated problems in the property sector, with defaults by major developers led by property giant Evergrande, had a knock-on effect on domestic lenders. FDI flows, domestic manufacturing, exports and consumer spending all remained weak, exacerbating China’s deflationary cycle. Such issues left Chinese equities trading at record lows.

However, a closer look at key metrics could indicate a disconnect between market sentiment and the reality on the ground. Box office sales increased in 2023, domestic tourism is booming with planned travel expenditures for 2024 surpassing 2019 figures, and car sales are reaching unprecedented highs. These are all important signals for a potential rebound in consumer spending this year.

Furthermore, the Chinese government has initiated measures to strengthen domestic demand, support the stock market and shift away from an over-reliance on infrastructure and real estate investment. A recent measure by Beijing to mitigate selloffs in the market and promote stability comes in the form of increased purchases of onshore Chinese stock market ETFs by state and sovereign wealth funds.

While measures so far have fallen short of substantial fiscal interventions many investors hoped for, the cumulative impact of the government’s smaller-scale initiatives should not be ignored. Furthermore, China’s upcoming National People’s Congress (NPC) session on 4-5 March is a key annual meeting where economic and social development plans for the year will be unveiled. Analysts expect a GDP growth target of 5% and the announcement of further measures to boost growth, support demand and improve the business environment.

So, given China’s attractive valuations, improving consumer sentiment and increasing fiscal support, why do we continue to invest cautiously in China?

First of all, despite some positive signs, structural challenges remain. 70% of household wealth is tied up in property, and the crisis is by no means over. Property investment and new construction dropped 9.6% and 20.4% respectively in 2023¹. Furthermore, Evergrande’s liquidation order in January and the liquidation petition filed against Country Garden on 28^th February are exacerbating the lack of confidence in the property sector. This may lead to an extended period of cautious consumer spending.

Additionally, the CCP’s intervention in the economy, coupled with lower corporate governance standards among Chinese companies compared to their Asian EM counterparts, continue to steer us away from direct investment in China. The CCP’s near destruction of the EdTech sector in 2021 is a prime example of the regulatory risks inherent in the country.

Finally, when it comes to companies, we rarely find the level of governance, fundamental quality and innovation that would meet our investment criteria. Instead, we prefer to access the Chinese market indirectly through countries such as Taiwan and South Korea which also benefit from improving consumer sentiment in China. For example, our portfolio includes Elite Material, a Taiwanese company specialising in components for the semiconductor industry. It operates manufacturing facilities across China and generates a significant proportion of its revenues in the country while offering Taiwanese standards of governance and transparency.

No investor can afford to ignore the world’s second largest economy and China is still forecast to grow by 4.6% in 2024², much faster than any developed market economy and many of its emerging market peers. So, we continue to scour the Chinese market for exciting companies that meet our quality investment criteria.

¹ National Bureau of Statistics of China

² IMF World Economic Outlook Growth Projections, January 2024

As we reflect on a volatile year 2023, we are reminded of the words of Winston Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”

The year unfolded with global fears of inflation, coupled with concerns over the ongoing conflict in Ukraine and uncertainties surrounding the US and European economies. A sluggish recovery in China and unsettling events, such as the terrorist attacks in Israel and the ensuing conflict added layers of complexity and prompted cautious positioning by investors.

Since our launch in 2018, MCP has weathered a pandemic, geopolitical turbulence and economic shocks. Our strategic choices, based on a rigorous focus on quality, careful selection of management teams and business models, and a vigilant awareness of macroeconomic and company-specific risks, have steered us through these turbulent waters. We avoided investing in Russia and had almost no direct exposure to China. By taking advantage of the opportunities presented by market conditions, the Mobius Emerging Markets Fund (MEMF) has generated sustainable long-term returns, culminating in a five-year track record of significant outperformance, with return of 26.9% (Private C USD Founder, as of 29 September 2023) since inception compared with the MSCI EM USD Index return of -8.6%. In the current year alone, MEMF has outperformed the MSCI EM Index by an impressive 10% (as of 29 December 2023).

One of the exciting companies that have contributed to our success is Classys. Founded as a family business in Seoul in 2007, Classys is the global market leader (ex-US) in non-invasive medical aesthetic devices with a 30% market share. Its cutting-edge devices use high-intensity focused ultrasound (HIFU) and radio frequency (RF). Classys’ “razor and blade” business model, which sells both medical devices and cartridges, has led to continuous gross margin improvements. Although the company is already present in 70 countries, its expansion into the US and China offers immense growth opportunities. In the third quarter of 2023, Classys again reported robust results, driven by product innovation and geographic expansion, and has provided positive guidance for FY24.

This positive momentum is not limited to Classys; it is evident across our portfolio. In particular, our technology holdings are seeing inventories normalise and demand pick up. Our quality portfolio companies have demonstrated resilience and adaptability, and as business and consumer spending continues to improve, our companies will benefit from the recovery. Although developed markets outperformed emerging markets in2023, low valuations, a potentially weaker USD and expected higher growth suggest a positive outlook for emerging markets in 2024.

We recently announced Mark Mobius’ well-deserved retirement from Mobius Capital Partners. We would like to express our gratitude for his mentorship, leadership, and the remarkable energy and passion he brought not only to the business but also to our lives. The firm and its vehicles continue seamlessly under Carlos Hardenberg’s leadership, supported by our exceptional team of passionate and dedicated analysts. We are committed to continuing to deliver superior long-term returns over the next decade.

We thank you for your continued trust and support. As we embark on the exciting path ahead, we wish you a happy and prosperous New Year. Thank you for being an integral part of our journey.

The Mobius Capital Partners Team