Analysis: Invesco’s Justin Leverenz on separating the gems in China

Justin Leverenz, CIO Developing Markets Equities and Senior Portfolio Manager at Invesco

The continued rise of China is reflected in the growing universe of attractive investment opportunities there. However, we are concerned there is some froth building, which could result in a market bubble. This argues for an active approach that can separate hype from reality.

China’s appeal

The appeal of Chinese equities was on full display in 2020. Investors loved China’s swift handling of COVID-19, which made it just about the only economic growth story in town as most other countries struggled to mount an adequate response.

Some of China’s most successful and visible companies were the apparent “COVID-winners” in areas like e-commerce, fintech, food delivery and drug development. This in turn shone the spotlight on the extraordinary levels of innovation in China.

Investors flocked to Chinese stocks in search of certainty and growth. However, most portfolios ended up investing in the same large Chinese companies, driven by the fear of missing out on the China post COVID-19 recovery story.

In many instances, this fear of missing out overshadowed key considerations about company fundamentals, untethering them from valuations, and leading to possible investment losses down the road.


Investing in China for the long term is complex. It requires an appreciation of the historical background and an understanding of the political circumstances, the resulting economic policies and its equity market.

We expect a combination of high investment levels, powerful structural reforms, sustained urbanization and improved capital allocation in China could underpin compound real growth over the next few years. We estimate this growth, on a US$14-trillion-dollar economy, could create economic output the size of India over three to four years.

While that growth provides a great backdrop for equities, it is not necessarily predictive of stock market returns. In fact, despite China’s significant gross domestic product (GDP) growth over the past decade, the country’s largest mainland stock exchange in Shanghai did not deliver positive returns for the entire decade ending in 2019.

Part of that had to do with the retail investor base, which treated the stock market like a casino. At the same time, there was a prevalence of large, state-owned companies with corporate governance policies that weren’t necessarily aligned with minority shareholders’ interests.


Only in the last few years have we seen a notable evolution in the composition of mainland stock exchanges. MSCI’s inclusion of China “A” shares, along with the opening of the Hong Kong Stock Connect platforms, has resulted in more attention from foreign investors and accelerated the institutionalization of the market. Additionally, we have seen more high-quality Chinese companies considering mainland China and Hong Kong as their preferred destinations for company listings.

This has been an important change with wide-ranging consequences. We believe it should lead to improved quality of companies listed on the exchanges and better investment opportunities for domestic investors, which in turn could potentially boost the performance of Chinese equities.

We expect this effect to be very significant as China has among the highest levels of household savings in the world and we anticipate a notable shift in asset allocation towards equities.

Unique companies

We believe the companies best positioned to succeed will have unique offerings, sustainable competitive advantages and strong governance. In addition, they will have cash flows and balance sheets able to support investment in the current business and to take advantage of future options.

While these characteristics are evident in many of the “COVID winners” of 2020 and thus far in 2021, there is an increasing disconnect between the narrative of success and the numbers that need to be delivered to justify current valuations.

This is not to imply that there aren’t compelling investment opportunities out there. In fact, we still see lots of value in several companies in China across a number of areas including restaurants, hotels, insurance, beverages, health care, e-commerce, logistics, and fintech.

Bottom-up research

To separate the hype from the reality, our investments in companies in these industries are not based on a thematic approach. They are based on stock-by-stock, bottom-up research with an emphasis on identifying high-quality companies trading at appropriate valuations.

In some cases, these stocks lagged because of uncertainty and skepticism of their near-term outlook. However, we would argue that these stocks, whether in China or Mexico or Russia or India, are extraordinary long-term investments that can generate strong returns over time.

While we believe that China should offer investors appealing investment opportunities in the decade ahead, we advocate for a multi-dimensional and diversified approach to seeking out China’s growth and investment opportunities across the emerging markets.

This active approach focused on differentiated research may help us avoid common landmines and position investors to generate compelling returns over time.


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