Highlights and takeaways from a selection of recent company visits
With global travel restrictions and pandemic dislocations now firmly behind us, Jerry Thomas, CIO Global Equities, and Analysts Kwai San Wong and Brook Harris have been back on the road to meet a diverse mix of companies in the US and Asia.
Face-to-face meetings with company management are a valuable complement to the fundamental research and ESG risk analysis that we carry out. They not only provide opportunities to see businesses in action; they also enable us to have one-to-one conversations and meet the personalities guiding the companies we invest in.
In the US consumer we trust
Brook Harris, Global Equity Analyst
In a hectic whistle-stop tour across the US, I met with 18 US consumer companies, including three that we hold under our Evolving Consumption theme: Home Depot, Disney and Colgate.
My most abiding impression was the confidence and optimism among company management. All bar one expect they will be well insulated against any downturn thanks to the robust health of their customers, with many expecting that the US economy will avoid a recession altogether.
The labour market came up frequently in conversation – with an interesting twist in the case of US auto parts distributor Genuine Parts. The reluctance of younger generations to follow their parents into family-run auto-parts businesses gives Genuine Parts opportunities to buy up these businesses and add them to its franchise. Meanwhile, home improvements giant Home Depot spoke about plans to continue investing in its workforce to improve the customer experience, highlighting another common thread among consumer companies that rely on face-to-face sales.
Companies appear to have their supply chains back to normal after the ructions caused by Covid. Many are future-proofing themselves against disruptive events by diversifying their supply chains, with cosmetics company Elf Beauty highlighting their renewed efforts to diversify geographically to reduce reliance on factories in China.
The pandemic has also had some positive knock-on effects. The craze to acquire pets during lockdown has left companies such as Colgate (which makes pet food as well as household, healthcare and personal care products) and Freshpet scrambling to meet demand for pet food. Colgate is rushing to complete a new pet food facility designed to reduce costs by maximising automation – a long-term trend that we invest in under our Automation theme.
It was noticeable how empty US offices are, raising a question mark over their future. Some companies, such as Airbnb and DoorDash actively use remote working to solve labour shortages. Others are keen to make two or three days in the office the norm, but find that remote working is now well established and there is low appetite among workers to return to the office.
An open and shut case in Hong Kong?
Jerry Thomas, CIO, Global Equities
It was great to see Samsonite dominating the advertising space around me in airports and malls on my recent travels through China, which included a highly encouraging meeting with Samsonite management in Hong Kong.
Travel is back on the menu for Chinese tourists and business travellers, and Samsonite – one of our holdings under the Evolving Consumption theme – continues to benefit from post-pandemic reopening.
It also has considerable leeway to grow its prestige Tumi brand in Europe and Asia, with little direct competition. We are confident that as sales grow, the company will continue to reduce its debt levels, reducing the impact of higher interest rates to the benefit of shareholders.
The company is also receiving more interest from investors in mainland China thanks to Southbound Connect, which allows mainland China investors to access eligible Hong Kong shares. Along with other premium brands, such as Prada and L’Occitane, Samsonite offers a way for Chinese investors to access global growth and diversify their portfolios.
Unloved China offers long-term value
Kwai San Wong, Equity Analyst
China has disappointed investors this year, with high hopes for a post-pandemic boom fading as China’s economic challenges have become apparent.
Our meeting with Tencent was therefore a timely reminder that China has some outstanding companies that are available at low valuations because of the current level of sentiment towards Chinese stocks. For selective and patient investors, a number of Chinese companies offer attractive returns with strong thematic growth.
Tencent is a holding in many of our clients’ portfolios under our Digitalisation and Evolving Consumption themes. Its core business of games, online advertising and fintech has seen margins improving from new products coming on stream – especially mini-games, short-form video advertising and AI tools. Furthermore, Tencent has the advantage of a good supply of the Nvidia H800 chips that it needs to make its AI ambitions a reality.
Several discussions touched on the practicalities of developing Chinese-language AI tools. A stumbling block is the relative lack of online Chinese-language material suitable for training AI models. This is not an issue that the English-speaking section of the internet faces. Translating English material into Chinese to train AI models also has its shortcomings, as I discovered when I sampled some recent AI tools and received unusual answers to my questions!
I took the opportunity to try out a robotaxi that was festooned with screens, cameras and sensors. These self-driving vehicles have undergone a lot of research and development and are being introduced to the general public. After a 45-minute journey through busy streets, my overwhelming impression was that the technology is ready but it will take time for regulators to be comfortable with a general rollout. Autonomous driving could be an example of a great innovation taking a lot longer to implement than people initially expect, but I have little doubt there will be real value in this technology for users and investors.
Bringing it back home
Disappointing recent growth in China and the most negative Chinese real estate indicators in 30 years urge caution. However, investors should not overlook the region’s world-class companies, a number of which have a bright future ahead of them. We recommend a highly selective approach to investing in China and economies that are closely tied to it.
Our discussions with US company management teams illustrate that labour shortages are still a daily headache, albeit one that is spurring innovation in automation and the use of remote working to recruit and work more efficiently. Overall, however, the US labour market is easing, suggesting further falls in US inflation on the way and the increasing likelihood of a soft landing in the US. This gives us confidence that any recession is likely to be milder than we feared a few months ago, and that US consumers remain in good shape.
 Macrobond, 19.09.2023
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