What does China's course mean for European investors?

China was the most developed country in the world for over 4000 years. Only in the last 400 years was this not the case. But over the last 40 years, China has been catching up again and has already overtaken the western world in many areas. The question many investors ask themselves, is how they can profit from this development. In other words, how can investors judge which changes currently offer the greatest growth potential and how can they use them to generate returns. To answer this, the team around Frank Schwarz at MainFirst has analysed general structural trends, specific Chinese developments and the country’s strategic orientation in order to be able to make the best investment decisions. Some interesting trends they found come from the area of power production and consumption. 

Strategy, innovation and energy 
The Middle Kingdom is known for its long-term planning. Its declared strategic goal by 2025 is to enhance Chinese industry, improve product quality, and advance automation and digitization. In order to achieve its strategic goals as the world's leading manufacturer of, for example, electrical power supplies, the Chinese state invests a good 2 percent of its gross domestic product annually in innovative projects such as alternative forms of energy. It is within the framework of this strategic orientation that the tenfold increase in the number of patent applications from China over the past ten years must be seen, as it is a clear sign of China’s greater innovative muscle and strategic positioning to fulfil their long-term goals.  

Structural trends in energy generation 
The time span between invention and patent application and the commercial adoption of it can take quite some time. For example, the technology for energy storage with lithium-ion batteries was invented about 80 years ago. But only by about 2005 had enough progess been made so that the batteries can be produced cheaply enough and can therefore be used more and more extensively. Since then, the further reduction in production cost has been fast: Between 2005 and 2017 alone, the price fell by a factor of 6 (from approx. 1300 to 209 US dollars). This allows companies to use lithium-ion batteries in new and different ways.

Tesla is a well-known name that takes advantage of this fact and not only uses the technology for its electric motors, but has also employed it in the Hornsdale wind farm in South Australia, which has a discharge capacity of 100MW and an energy storage capacity of 129MWh, making it the largest battery storage facility in the world. The implications of this trend are enormous, because renewable energy has the incredible advantage that once the infrastructure is in place, energy production costs are close to zero.

Energy and other consumption in China 
China is following suit and is starting to develop and exploit the possibilities of lithium-ion batteries in a variety of ways. Battery production facilities for electric automobiles are currently being built, so that by 2021 China is expected to produce 70 percent of the world's production of electric vehicle batteries. In 2019, construction also began on the first Gigafactory for batteries in China. In view of China's continuing growth, the search for new ways of generating energy is urgently needed, among other things to satisfy the country's growing hunger for electricity. By 2030, about 9 of the world's 15 largest cities will probably be Chinese. These developments require enormous investments in power generation.

At the same time, the purchasing power of the Chinese will also continue to grow, as the volume of private assets in China alone will grow by up to 180 percent in the next 10 years to almost 70 trillion US dollars, second only to the USA, which will reach estimated private assets of 75 trillion US dollars. These are developments that will boost growth not only in the energy sector, but also in other areas such as financial transactions or luxury goods. Companies that stand to benefit from this growth are such Chinese giants as Alibaba and Tencent, but also international luxury goods manufacturers such as LVMH, Kering and Canada Goose.

In the MainFirst Global Equities Fund and the MainFirst Global Equities Unconstrained Fund, Frank Schwarz and his team use such developments to generate attractive returns for investors. The MainFirst Global Equities Fund has generated an annual performance of almost 14 percent since its inception six years ago (ISIN LU0864710602, as at 28.02.2019).