Scott Berg, CFA® Portfolio Manager, Global Growth Equity Strategy
Eric Moffett, Portfolio Manager, Asia Opportunities Equity Strategy

The views contained herein are those of the presenters as of the date and time noted and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. This material is not intended to be investment advice or a recommendation to take any particular investment action.

Importance of U.S.-China relationship/Trade Tensions

• Both Scott Berg and Eric Moffett reminded us of the importance of the relationship. They are the two largest and most important economies in the world, and both have enormous impact on each other.
• When the coronavirus hit China at the beginning of the year, it caused huge interference for global supply chains. The impact it had on many U.S. companies was striking. Equally, as China worked its way through the virus more successfully, and was ready to get back to work, they found a U.S. economy shut down, which meant demand for its products fell sharply.
• Scott believes it is in neither country’s interest to end up in a place of hostility, or not working together.
• Eric believes that tensions are likely to remain elevated, no matter who wins this upcoming election. He also noted that people in China don’t have any illusions that the relationship will go back to anywhere close to where it was 10 years ago. However, there is a sense that if Biden wins, at least it will stop getting worse.
• Eric said that trade tensions hadn’t really changed how he invests. He remains focused on high-quality companies that can compound earnings over time, regardless of what happens in the wider economy. Those companies have held up well as tensions have escalated.

China’s long-term strategic plans and priorities

• Eric described how China’s last five-year plan (2016–2020) was broadly focused on technology, and, striving for technology independence.
• It also had aspirations around the environment and inequity in society; ensuring that the income gap didn’t become too wide.
• For the 14th five-year plan (2021–2025), which is due to be released in March 2021, he expects China to focus on similar areas.
• China wants to ensure that it avoids the middle-income trap and is constantly focused on moving up the value chain. He believes that of all the Asian economies; China has the best shot at this.

Innovation—U.S. strength and China’s transformation

• Both countries are leading the way in technology and innovation, and both believed this sets you up well to find strong investment opportunities.
• Scott spoke of the race for dominance in artificial intelligence (AI) and big data, with the U.S. having the edge in terms of genuine innovation. China’s ability to access data, along with its much larger pool of affordable engineers, allows it to scale and monetize its technology better.
• The striking and exciting part for both has been the pace of innovation, with China moving rapidly from a low-cost manufacturer to global innovators.
• But China isn’t just regurgitating ideas according to Berg, it is breaking new ground and defining innovation on its own terms.
• He identified two key areas: consumer technology and healthcare. Fintech is particularly exciting. Companies are taking the notion of fintech and moving it onto a much greater scale.
• Companies are using all the benefits of technology to leverage massive data in financial markets, whether that’s on payments, lending, insurance or wealth management. These companies also benefit from a totally clean sheet with no legacy systems or legacy business to contend with.
• Within healthcare, China is striving to build out a robust health care system for its 1bn+ population, with homegrown players being integral to that plan. The coronavirus pandemic has only accelerated this desire.
• China managed to test the whole city of Wuhan (population approx. 11m) back in June, while authorities from China came to Hong Kong in the first two weeks of September and tested 1.7 million people. The ability to do that very quickly has been key to how China has been better able to contain the virus.

Opportunities Outside of Technology/Healthcare

• Eric believes that some of the best risk-adjusted returns can be found outside of technology.
• He spoke of how deep the market is in China, and how like every other emerging market, it goes through different phases. These can be very powerful drivers of growth.
• He identified one of the largest themes being “consolidation”. He is really focused on investing behind these consolidation trends, because if you can invest in one of the ultimate winners, then growth can be phenomenal.
• Importantly, it has nothing to do with how the macro environment is behaving, and it also doesn’t even matter if the underlying industry is growing or not. If the consolidation tailwinds are strong enough, they can prove beneficial for investors.
• He gave examples of hotel chains, restaurants and offline pharmacies where there are specific companies who are gaining market scale and becoming the main low-cost producers in their field.

China’s A-share Market

• Eric remains excited by the depth and breadth of the A-share market. It remains a fertile market for ideas and he and the team are putting increased focus on it as it opens up further.
• However, you must tread carefully as there are many low-quality companies run by poor management teams, but who have seen their share prices elevated for speculative reasons. Its therefore important to do your homework.
• Encouragingly, we believe the runway for growth of the companies we have identified is huge. There are also many that have the potential to grow outside of China. Currently, most are only focused on their home market, but many can become multinationals.
• Scott concurred with Eric’s point of doing your homework. He said that as active managers we can take advantage of market inefficiencies in these types of market, using our global research platform to sort out the wheat from the chaff.
• Emerging markets are much less efficient than developed markets, and for an active manager that provides a real opportunity where people do get emotional, and where liquidity can be a problem for the smaller investor.
• For a firm that has deep research capability and has boots on the ground, these kinds of markets are where you can generate a lot of alpha with good quality research.