China Is a Superpower and an Emerging Market. How to Invest Now.

Virginie Maisonneuve, global CIO Equity of Allianz Global Investors, in London on July 21st, 2022.

Photograph by Harry Mitchell

Virginie Maisonneuve’s fascination with China began when she was 5 years old and living in Paris. She loved listening to stories from a book of tales from China and poring over the delicate drawings that adorned its pages. She went on to earn a degree in Mandarin Chinese and become an investor, working and living all over the world.

“I always knew that I would get involved with China,” says Maisonneuve, managing director and global chief investment officer for equity at Allianz Global Investors. She began her career in China as a consultant for the French Ministry of Foreign Affairs in Beijing. Since then, she has held portfolio management and chief investment officer positions at companies such as Pimco, Schroders, and State Street Research, and has pioneered investing in areas from China to environmental, social, and governance, or ESG.

Barron’s reached Maisonneuve at her home in London to discuss China and Taiwan, ESG investing, and climate change. An edited version of our conversation follows.

Barron’s: House Speaker Nancy Pelosi’s recent visit to Taiwan has taken U.S.-China tensions to a new level. How is the Taiwan situation likely to play out?

Virginie Maisonneuve:The topic of Taiwan is a delicate one for China, especially so close to the upcoming 20th Party Congress, where President Xi Jinping is likely to be reappointed as general secretary for a third term in the fall. China has shown the world its military power [with its recent war drills] and its willingness to align words with some level of action.

It isn’t in China’s or the U.S.’s interest to have a physical conflict over Taiwan. From an investor’s perspective, the strength of Taiwan in specific sectors—such as technology and, specifically, semiconductors—remains. If valuations were to fall dramatically lower on geopolitical tensions, investors should take advantage of the opportunity to add more to their portfolios.

How should investors be thinking of their allocations to China at this point?

Given the size of the Chinese economy and of its capital markets, I believe China actually needs to be considered as its own asset class by investors. It is no longer a standard emerging market, but instead offers a hybrid profile combining emerging markets characteristics and that of a superpower. In its own way, China also offers diversification in portfolios, given how the economy is managed along its five-year plans. For example, as of today, while the world is tightening monetary policy, China is doing the opposite.

China as an asset class doesn’t mean investors should have a static or constant exposure to China at all times, but it means that it needs to be thought of separately from the other markets in the region or globally.

China’s stocks, like those in the U.S., have taken a drubbing this year. The iShares MSCI China exchange-traded fund is down some 22% this year. Is it time to start buying?

China equities could be increasingly attractive, given valuation and long-term earnings power, though volatility is likely to continue. Although the government more recently has stepped away from target gross-domestic-product growth numbers and stipulated a best-effort growth, China’s GDP growth will offer opportunities to investors, especially in areas currently underestimated by foreigners, such as innovation, the greening the economy, and infrastructure. China also currently has a divergent monetary policy versus the rest of the world, as the central bank is now loosening, not tightening, which is more likely to support its capital markets.

This has been a tricky year everywhere, with high inflation, rising interest rates, and a possible recession. What’s your general advice for positioning portfolios?

As we wrote in our midyear outlook, we believe investors would benefit from a diversified portfolio anchored around a selected number of high-conviction strategies in four pillars: One, quality value stocks that have healthy dividends; these may earn a premium price from investors amid higher interest rates. Two, quality growth stocks with strong balance sheets. Three, specific long-term, high-impact thematics such as energy security, water, and food security, given the geopolitical uncertainties that have made these areas more vulnerable. Also in this pillar, companies with impactful innovation in areas such as artificial intelligence, cybersecurity, and climate mitigation/adaptation. Four, clear risk-control processes. Sustainability and ESG is a theme that runs through the four pillars. Given the context of climate change, I believe ESG is the “new normal” for portfolios.

Let’s back up for a minute: How do you define “quality value”?

I see deep value as the equity portion of the market that shows very low and sometimes distressed valuation. Quality value focuses not only on valuation but also on balance sheet quality, which provides more stability to the portfolios. Ideally, those stocks also offer dividend or income support. And it is very important in this environment of volatility to buy resilience.

And why is ESG important to your approach?

On a longer-term basis, companies need to understand where they source their energy, for example, or what the best practices are in governance and sustainability and the environment. All of that will help build longer-term business models that survive and thrive—and in volatile environments, that’s very, very important.

There has been a lot of criticism of ESG investing this year. Do you think the backlash has been overdone?

Yes, definitely. In light of the Ukraine situation and the post-Covid economic recovery, the sharp increase in oil and coal prices has put doubt in some investors’ minds about the validity of ESG investing. This is a short-term phenomenon.

ESG is the new normal for long-term investors for several reasons. First, because of climate change, pressure on the ecosystem that companies operate in will continue to increase as global regulations around carbon emissions, environmental frameworks, water usage, etc., continue to tighten. Second, the increase in awareness of the stress on the planet’s resources, combined with the increasing pressure on global political infrastructure and system, given increasing populist trends, will lead to a stronger focus on inclusive capitalism. The combination of those factors and the requirements of clients, including pension plans and individuals, means that although financial returns are still top of the agenda, other factors, including ESG, sustainability, and positive outcomes, are increasingly important.

You’ve said in the past that the U.S.-China trade war was really about U.S. concerns over the speed of technological development in China. How are you thinking about China’s technology now?

I think of the next wave of production and competitiveness linked to technology as digital Darwinism. I really believe that China is about to embark on a huge phase of innovation that the world is underestimating. There are more biotech companies now in China than in the U.S. That doesn’t mean they all have the right product, but versus 30 years ago, it’s just amazing.

China has passed the perfect storm of Covid, the lockdown, issues in the property sector, and changing regulations around the tech sector. It’s a new China, in a way.

What do you mean by “digital Darwinism’’?

At its core, U.S.-China tensions are an ongoing digital Darwinism—a multidecade global power race based on the integration of technology and artificial intelligence in a world threatened by climate change.

How does an investor invest in the theme of digital Darwinism?

You can invest in many ways. First, through the technology sector directly. Second, through the enablers, such as the infrastructure and hardware supporting the digital evolution, or even the metaverse. And third, through the beneficiary companies. Not all beneficiaries have to be technology companies. In fact, a traditional company that suddenly embraces a new vision and new tools and does things differently could see powerful changes that aren’t reflected in valuations.

The changes are permeating all sectors, and the disruption trends are propagating rapidly, which is creating opportunities. The key is really to understand how the technology plus the vision can enable that competitiveness versus other companies in a particular sector.

Thanks, Virginie.

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