Latest news with #JosefLicsauer
Daily Mail
07-07-2025
- Business
- Daily Mail
Is China uninvestable or misunderstood? The INVESTING ANALYST
After years plagued with economic issues, escalating geopolitical tensions and weak investor sentiment, is China's recent recovery an indication of brighter years ahead? In this column, Josef Licsauer, Investment trust research analyst at Kepler Partners, explains why China could offer an opportunity for investors. There was a time when China felt unstoppable. After joining the World Trade Organization in 2001, it quickly became the world's factory floor, driving globalisation, ramping up exports, and fuelling a commodities supercycle with massive investment in infrastructure and real estate. Between 2000 and 2010, its GDP grew by an average of 10.6 per cent, enriching emerging markets and powering global growth. But that once-compelling growth story has since lost its shine. In the decade that followed, momentum cooled as China tried to rebalance its economy away from exports and infrastructure toward domestic consumption. Rising debt, industrial overcapacity and an ageing population began to weigh on the long-term outlook, even as headline GDP remained relatively strong. A brief rally in 2021 offered some hope, but it was short-lived. Strict lockdowns, a spiralling property crisis, tech crackdowns, and rising tensions with the West reasserted themselves, knocking investor confidence and sending sentiment into retreat. Since then, Chinese equity valuations have slumped to near historic lows and the country's index weighting has fallen from a peak of around 40 per cent to the low 20s. But amid the disruption, opportunity is stirring. Valuations remain deeply discounted, stimulus is gaining traction, and internal growth drivers – from tech innovation and AI to rising healthcare demand and a push for self-sufficiency – are beginning to reassert themselves. For investors willing to look again, investment trusts may offer one of the most effective routes back into China. Return of the King (Consumer) Just as The Return of the King brought Tolkien's epic Lord of the Rings trilogy to a triumphant close, and found a surprisingly devoted fanbase in China during its 2021 re-release, the consumer may now be stepping back into the spotlight in China's economic narrative. While confidence remains fragile, early signs of recovery are visible in rising footfall, discretionary spending, and experience-led consumption. A key driver? The $10trillion surge in household savings since 2020, a staggering sum exceeding the GDP of Japan or Germany. As confidence continues to improve, that pool of capital could fuel a powerful cycle of consumption, hiring and reinvestment. We're already seeing early evidence. Guming, a fast-growing teahouse chain, has seen its share price surge over 160 per cent since listing earlier this year on the back of consumers returning to the city and spending again. Similarly, Haidilao, the hotpot giant, is benefitting from renewed appetite for social dining post-Covid, Luckin Coffee continues to dominate value-focused caffeine and for affluent consumers, and premium names like Kweichow Moutai remain in high-demand. JPMorgan China Growth & Income (JCGI) has tapped into these trends with a portfolio tilted toward domestic-facing names. The managers added Guming at IPO and have recently increased positions in other domestic-facing names they believe will benefit from experience-led recovery. The opportunity, they argue, lies not in exports, but in China's internal engine. Baillie Gifford China Growth Trust (BGCG) shares this domestic tilt and a focus that has supported its outperformance of the MSCI China All-Share Index over the past year. Managers Sophie Earnshaw and Linda Lin are targeting areas supported by stimulus and policy, alongside firms driving innovation in manufacturing and high-end tech. On the consumer front, core holdings like Luckin Coffee and Kweichow Moutai reflect their belief these businesses are central to China's long-term transformation. Policy support and stimulus The Chinese government unveiled a wave of targeted support in September 2024, aimed at stabilising the property sector, boosting consumption and accelerating high-priority industries like AI, semiconductors and green tech. The stimulus package was worth up to 7.5trillion yuan (around $1.07trillion), potentially the largest in the country's history in nominal terms, according to Deutsche Bank. The measures, designed to shore up confidence in key areas of the economy, included mortgage relief, stock market support, local government bond issuance, and capital injections into state-owned banks. The message is clear: policymakers are committed to restoring confidence and lifting domestic growth. Fidelity Asian Values (FAS) is one trust with exposure here. Managers Nitin Bajaj and Ajinkya Dhavale have reduced exposure to India, where they now see stretched valuations and reallocated capital into undervalued Chinese companies tied to domestic demand. Despite ongoing geopolitical and macro risks, they see 'caged upside': long-term growth potential yet to be realised in undervalued, well-capitalised, well-run businesses with limited exposure to global trade volatility. One example is Full Truck Alliance, China's leading digital freight broker, which plays a pivotal role in modernising the country's logistics network. FAS remains overweight China and the managers believe that the brief sentiment rally of late 2024, triggered by stimulus, could repeat. With substantial capital still on the sidelines, a sustained improvement in earnings could spark a meaningful rebound. For those after a more balanced approach, JPMorgan Global Emerging Markets (JMG) maintains a neutral China weighting but within that holds select domestic-facing stocks that could benefit from stimulus tailwinds. It's another way to stay exposed to China's upside potential while remaining diversified across the broader EM landscape. Innovation and independence China's drive for technological self-sufficiency is another area drawing investor interest. With geopolitical tensions rising, the country is accelerating efforts in AI, software, advanced manufacturing and supply chain independence, all backed by targeted policy support. It's a long game, but one that could help reduce reliance on foreign tech and reshape the country's economic future. The launch of DeepSeek's AI model – viewed by many as China's answer to ChatGPT – reignited interest in alternative, homegrown productivity-enhancing technologies. These companies may not yet rival US giants, but they're evolving fast, and often trade at a fraction of the price. Some are even partnering with or supporting global leaders like Nvidia, reinforcing their growing relevance. JCGI has recently increased exposure to names aligned with this theme, including Kingsoft, a leader in office software and cloud computing. Baillie Gifford China Growth (BGCG) is following a similar path, uncovering value in firms like Horizon Robotics, which develops AI chips for autonomous vehicles and smart cities, and industrial champions like CATL and BYD, leaders in the EVs and battery tech. For long-term investors, China's innovation drive could offer a multi-year growth runway. And with valuations near historic lows, it's fertile ground for active investors to uncover pricing anomalies and compelling entry points. The trusts highlighted in this piece are all trading on discounts wider than their five-year averages, except for JMG, which is slightly narrower than its historical average but still wider than the Global Emerging Markets sector overall. For investors, that could represent a double discount opportunity: accessing undervalued Chinese companies via investment trusts that are themselves trading at wider discounts relative to their long-term norms. The playbook has changed China's potential comes with caveats. Sentiment is fragile, and risks – from regulatory shifts to US trade restrictions – loom large. Confidence, especially among global investors, won't return overnight. But that's precisely why I think valuations look attractive. Many high-quality businesses with strong fundamentals are trading at multi-year lows. Some deserve their discounts, but others have been swept up in broad-based pessimism and macro-driven sell-offs. China continues to divide opinion. Some see structural decline; others, temporary growing pains. The reality is likely somewhere in between. What is clear is that yesterday's playbook no longer fits, but for selective, long-term investors willing to look past the short-term noise, the long-term case is quietly rebuilding. I'm not advocating a full-scale pivot. But with the world's second-largest economy priced for pessimism, having no exposure at all could prove just as risky, especially if sentiment quickly turns. Sometimes, the most compelling opportunities are the ones that feel the most uncomfortable.
Daily Mail
09-05-2025
- Business
- Daily Mail
Investment trusts to back the unloved UK's undeniable opportunity: The INVESTING ANALYST
What if the UK market isn't the forgotten backwater of global investing but instead a hidden realm of impressive total returns? In this column, Josef Licsauer, Investment trust research analyst at Kepler Partners, explains why we shouldn't shun less glamourous London-listed stocks. The UK market has long been dismissed as an uninspiring place to invest. Lacking the high-growth tech giants that dominate the US, it's often seen as a home for 'boring' companies with little to no growth prospects—traditional banks, oil majors and tobacco stocks that don't carry the same excitement as the market-darling tech names splashed across headlines. At first glance, it's easy to see why. Years of economic uncertainty—from Brexit to a revolving door of political instability—have served to reinforce this perception. But such labels fail to capture the dynamism simmering beneath the surface—a market brimming with resilient, financially strong, yet undervalued opportunities hiding in plain sight. What's changed? For years, UK equites have traded at a discount to global markets, particularly the US, weighed down by sector composition, investor apathy, and the perception of limited growth potential. But the tide is turning, not least as recent events cause investors to question US exceptionalism. Since late 2021, rising interest rates have reshaped market dynamics. Despite a few cuts since August 2024, rates remain stubbornly high. In this environment, UK companies have delivered steady returns, benefitting from strong cash reserves and healthy balance sheets—factors that have favoured rate-sensitive and income-generating stocks over speculative, high-growth plays. Surprisingly, many UK stocks—particularly in the financial, service and defence sectors—have outperformed the AI-fuelled hype of the Magnificent Seven (Mag7). These companies have quietly delivered standout returns, seemingly flying under the radar but proving that there is more to UK equities; they can deliver growth, too. FTSE 100—big, boring, but beating expectations Clearly, the impact of tariffs on US tech giants has been stark Before Trump's early tariff murmurs, the performance of the Mag7 was much more comparable—but fortunes have shifted fast. These are high-growth innovators with huge return potential, but they're not immune to sharp reversals. In such a fast-moving environment, it's crucial to stay focussed on the long term and consider diversifying across other growth avenues—such as the often-overlooked UK names that have delivered not just resilience, but impressive growth. Over the past three years to 31 March 2025 – looking at pre-'Liberation Day' data to set aside recent volatility and instead focus on fundamentals over a few years' time horizon – several FTSE 100 stocks have quietly delivered outstanding returns, largely unnoticed by investors. When we compared the seven strongest-performing FTSE 100 names against the Mag7, UK stocks came out ahead, with average returns surpassing those of their high-growth US counterparts. Comparisons: Magnificent Seven versus the FTSE 100 Take NVIDIA—the best-performing Mag7 stock—propelled by its dominance in semiconductors and soaring AI demand. It delivered a staggering total return of 297.8 per cent, though that figure has slipped with recent tariff-driven volatility. At the start of the year, it was trading at a lofty P/E ratio of c. 50x, yet Rolls-Royce—trading at less than half that valuation—has delivered far superior returns. Meanwhile, the next six top performers in the FTSE 100—a mix of financial, services, and defence stocks—have outperformed five out of the seven Mag7 stocks. Expanding the view further, the next 31 top-performing FTSE 100—including Babcock International Group, Imperial Brands and Barclays—have also outpaced five of the Mag7, delivering returns of 126.3 per cent, 120.3 per cent, and 119.3 per cent, respectively. Not bad for what many still consider the Jurassic Park of stock markets. A key driver behind this quiet resurgence? Capital discipline. Many UK-listed firms are in far stronger financial positions than a decade ago—an essential advantage in a high-interest-rate environment. Fundamentals are improving, with higher return on equity and reduced leverage pointing to stronger profitability and healthier balance sheets. Crucially, this financial strength is being channelled into shareholder-friendly actions that are driving stock returns. Steadily increasing dividends remain a cornerstone of UK investing, while a surge in share buybacks— nearly half of UK-listed companies repurchased shares last year, the highest percentage among global markets—signals that companies themselves recognise their undervaluation and are taking proactive steps to enhance shareholder returns. Simultaneously, persistently low valuations have fuelled a wave of corporate takeover activity, with international buyers looking to snap-up UK companies at discounts to intrinsic value. These factors, combined, are driving total returns and reinforcing the investment case for UK equities. Beyond the FTSE 100 horizon But the buck doesn't stop there. Further down the market-cap spectrum, several small- and mid-cap stocks have delivered equally impressive outperformance over the same three-year period. Among FTSE 250 constituents, financial firms like Lion Finance (+473.0 per cent) and TBC Bank (+374.7 per cent) have significantly outperformed all Mag7 stocks, while others—XPS Pensions (+244.9 per cent) and ME Group (+235.3 per cent)—have beaten all but one of the Mag7. And in the AIM market, a standout performer is a UK tech stock—yes, you heard that right. Filtronic, a specialist communications equipment provider listed on AIM, hasn't just kept pace with the Mag7 but flown past them, delivering an eye-watering 816.9 per cent return over the past three years. Much like their larger counterparts, these companies have thrived on strong cash flows, higher rates, acquisitions, and a focus on robust shareholder returns. Active managers finding opportunities others might miss Many UK stocks trade at lower valuations than high-growth US tech, yet some—like those highlighted earlier—offer comparable or even superior growth profiles. So why are they being overlooked? One reason is visibility. Unlike the Mag7, whose products are ingrained in daily life, many of the UK's best-performing stocks operate behind the scenes, lacking the same front-facing brand recognition. Meanwhile, the broader UK market has lagged the US, which combined with its ongoing economic issues have likely dampened investor sentiment further. Yet, within this seemingly sluggish market, active stock pickers—particularly through investment trusts—have delivered strong returns by uncovering undervalued, financially sound businesses, like the ones highlighted earlier. Despite this, many UK-focussed investment trusts remain on wide discounts to NAV, reflecting past struggles and lingering scepticism. For contrarian investors, this presents an opportunity—not just for potential upside if sentiment shifts, but also enhanced yield in income-generating trusts. Take Edinburgh Investment Trust (EDIN), currently trading at a wider discount than both its five-year average and sector. Despite this, it's outperformed its benchmark by 9.3 percentage points over the past three years (to 31/03/2025). Its balanced, total-return approach—focussing on high-quality businesses like NatWest, that prioritise shareholder returns—has thrived amid a high-rate environment. Similarly, Temple Bar (TMPL) has beaten its benchmark by 21.0 percentage points over the same period. Its disciplined value investing approach—targeting attractively valued business with strong cash generation and sustainable dividend growth—has led to holdings like Standard Chartered which align with its shareholder-focussed, total return ethos. This focus has helped it navigate challenging markets. While its discount is narrower than its five-year average, it remains wider than the sector, still offering investors a differentiated way to access UK equities. Opportunities extend to smaller companies too. Fidelity Special Values (FSV) takes a multi-cap approach, diverging significantly from the FTSE All-Share to target overlooked and undervalued opportunities across the market-cap spectrum, including TBC Bank. With smaller companies receiving less analyst coverage, it creates a fertile ground for discovering mispriced opportunities. It's outperformed its benchmark by 6.0 percentage points over the past three years, and while it trades at slightly narrower discount compared to its five-year average it offers investors differentiated access to this part of the market. At the smaller end of the scale, Rockwood Strategic (RKW) focusses on companies trading at steep discounts to their intrinsic value, often overlooked due to limited research coverage and institutional interest—Filtronic being a standout performer. This strategy has driven sector-leading performance, with RKW outperforming its benchmark by 50.6 percentage points over three years. While it currently trades close to par, RKW's distinct approach and differentiated portfolio provide investors with unique access to UK equities. The UK market remains unloved, yet beneath the surface lie undervalued opportunities. Improving fundamentals alongside attractive valuations suggest that now could be a good time to time to look at UK equities—particularly through investment trusts, many of which trade at historically wide discounts. While the UK may lack the speculative excitement of AI-driven stocks, it offers something equally valuable—resilient businesses, strong cash flows, and a commitment to shareholder returns. Recent market swings drive this home. Tariff-related volatility has triggered sharp sell-offs in major US names, erasing gains built up over years. While global markets have felt some ripple effects, it's been to a much lesser extent and the UK has delivered a modest positive return year-to-date, compared with an 8 per cent drop in the S&P 500. This isn't a call to abandon high-growth US tech or shift entirely to the UK. It's about balance. The UK market can serve as a valuable diversifier in a growth-heavy portfolio, providing access to a market that remains underappreciated yet rich with stock-specific opportunities. For investors willing to look past the headlines, UK trusts offer a compelling entry point to these opportunities.
