Notes from the road

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Laurence Bensafi, Deputy Head of the RBC Emerging Markets Equity Team and Lead Portfolio Manager on the RBC Emerging Markets Value Equity Strategy, shares her insights following a recent research trip to China and Hong Kong in January 2020.

Chinese property: an unloved sector with a positive outlook

During our trip to China we visited various property developments across Shenzhen, Dongguan as well as the new free trade zones. We were left with a positive impression on the Chinese property market overall, given healthy prices, inventory levels and mortgage rates, alongside robust demand as people look to upgrade to better housing and rising wages make housing more affordable. Sentiment has also been important for demand and the US/China trade war has negatively impacted confidence over the past two years. A trade deal as well as stable economic growth in China should support the market. Gradual loosening should continue, though the central government remains focused on market stability rather than excessive growth, which we view as positive.

This trip also reinforced our view that when investing in property companies in China, being selective is key. High quality developers have access to the most attractive land and focus on profitable projects, while vacant and failed projects can quickly lead to poor results and balance sheet issues.

Historically, property developers in China have generally been regarded as volatile investments. However, we believe that the perception is changing and, as the sector matures, it is becoming more attractive for equity investors. The main themes we uncovered during our trip are: ongoing industry consolidation leading to higher quality, better growth and sustainable margins for the listed payers; diversification into recurring revenues notably through property management; the acceleration of urban renewal projects; and a more stable residential market driven by central government policy.


Photo taken by the team during their visit to Dongguan, January 2020. The photo shows a redevelopment project in Dongguan, designed to revive the area into a contemporary multi-use development with modern housing, offices, restaurants and green spaces.


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Hong Kong: at a crossroads

 

During our trip to Hong Kong we didn't witness any sign of the protests which have shaken the city in recent months. However, based on our discussions with residents, the topic has become a huge divider between mainland Chinese and native Hong Kong people. One thing that they both agreed on were the challenges of living in the city. Hong Kong property is amongst the most expensive in the world and people have to reside in tiny apartments relatively far away from their work. The main reason for the high prices is the limited supply with only a tiny portion of the land in Hong Kong being residential. Expanding the residential land would help to alleviate the situation, though this is unlikely to happen given a handful of powerful families control the supply and benefit from higher prices and a tight market.

One impact of the protests has been the reduced lure of Hong Kong in terms of job prospects and entertainment, as people increasingly recognize the huge progress that has been made on mainland China. The quality of life on offer in some cities on the mainland is now arguably superior to Hong Kong due to dramatically improved infrastructure, while air quality and space are less of a luxury. Anecdotal evidence suggests that some Hong Kong residents are now choosing to spend their weekends on the mainland, while others are even considering moving. Just a short car or train journey away from Hong Kong, for example, is the mainland Chinese city of Shenzhen. A rural backwater only a few decades ago, the city has now become a technology hub, home to the likes of technology giants Huawei and Tencent.

Photo taken by the team during their visit to Shenzhen, January 2020. The photo shows the expansive green areas and space on offer in the city.

The ongoing rise of the internet sector coupled with the decline of the banking industry will probably accelerate this trend further, as young people no longer aspire towards a career in finance. Working for Alibaba, Tencent or a technology start-up is now the favoured career path.

As the finance hub of Asia, Hong Kong is now at a crossroads. As the technology sector continues to grow, Hong Kong will need to evolve in order to remain relevant. In particular, it will need to deal with the huge inequalities which has been the ultimate source of the recent protests.

This information should not be considered a recommendation to buy or sell any specific security or other financial instrument.


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Portfolio Manager, RBC Global Asset Management (UK) Limited,  Christoffer Enemaerke, and Product Specialist, RBC Global Asset Management (UK) Limited  Dijana Jelic, with Mayur Nallamala and Tomonori Kaneko from the RBC Global Asset Management (Asia) Limited, on a company visit in Mumbai, India. November, 2018.


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Guido Giammattei, Portfolio Manager, RBC Global Asset Management (UK) Limited and the Team’s Head of Research, at a company demonstration in Seoul, Korea. May, 2018.


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The Team at an automotive plant in Seoul, Korea. May, 2018.

Information provided for illustration purposes only to demonstrate the investment management process of the investment team and is not a recommendation to buy or sell any specific security or other financial instrument.


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Portfolio Manager, and Deputy Team Head, RBC Global Asset Management (UK) Limited, Laurence Bensafi, visiting a paint company near Bangkok, Thailand. February, 2018.


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Portfolio Managers, RBC Global Asset Management (UK) Limited Ashna Yarashi-Shah and Laurence Bensafi, on a site visit near Bangkok, Thailand. February, 2018.

Information provided for illustration purposes only to demonstrate the investment management process of the investment team and is not a recommendation to buy or sell any specific security or other financial instrument.


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Portfolio Managers Ashna Yarashi-Shah and Zeena Dahdaleh, on a factory visit in Manila, Philippines in February 2018.


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Guido Giammattei, Portfolio Manager, RBC Global Asset Management (UK) Limited and the Team’s Head of Research, on a company visit in Taipei, Taiwan. January, 2018.

Information provided for illustration purposes only to demonstrate the investment management process of the investment team and is not a recommendation to buy or sell any specific security or other financial instrument.


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Team Head, RBC Global Asset Management (UK) Limited, Phil Langham, and Portfolio Manager, RBC Global Asset Management (UK) Limited, Zeena Dahdaleh, at a company campus and innovation centre in São Paulo, Brazil. November, 2017.

Information provided for illustration purposes only to demonstrate the investment management process of the investment team and is not a recommendation to buy or sell any specific security or other financial instrument.


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The Team on a factory site visit in Guangdong, China. October, 2016.


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Portfolio Managers, RBC Global Asset Management (UK) Limited Richard Farrell and Veronique Erb, in an air conditioning factory in Foshan, China. October, 2016.


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Portfolio Managers, RBC Global Asset Management (UK) Limited Christoffer Enemaerke and Richard Farrell, on a company factory tour in Beijing, China. September, 2015.

Information provided for illustration purposes only to demonstrate the investment management process of the investment team and is not a recommendation to buy or sell any specific security or other financial instrument.


This is NOT considered as any recommendation to buy or sell any specific equity in the investment portfolio.

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