China 2022 Ready for the Rebound - Tiffany Hsiao, CFA Managing Director and Portfolio Manager - Artisan Partners
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China 2022
Ready for the Rebound
Tiffany Hsiao, CFA
Managing Director and Portfolio Manager
For Institutional Investors Only—Not for Onward DistributionToday’s Topics
Valuations more attractive amid volatility
Optimism for 2022 as policymakers recalibrate
Smaller companies offer structural growth opportunities
Q&A
We will open the floor for questions
ARTISAN PARTNERS 1REVIEW AND INSIGHTS
Valuations More Attractive
Growth stocks corrected
Small caps held up better
Domestic sentiment stronger
ARTISAN PARTNERS 2MARKET ENVIRONMENT
Growth Stocks Corrected on Stagflation Fears
Value vs. Growth (%)
12 Months Ending 30 Sep 2021
40
30
20
10
0
-10
-20
-30
Jan 2021
Jul 2021
Sep 2020
Sep 2021
Nov 2020
Mar 2021
May 2021
— MSCI China Growth Index
— MSCI China Value Index
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. Past performance does not guarantee and is not a reliable indicator of future results. 3MARKET ENVIRONMENT
Small Caps Held Up Better Than Large Caps
Small Company vs. Large Company Stocks (%)
12 Months Ending 30 Sep 2021
40
30
20
10
0
-10
-20
Jan 2021
Jul 2021
Sep 2020
Sep 2021
Nov 2020
Mar 2021
May 2021
— MSCI China SMID Index
— MSCI China Index
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. Past performance does not guarantee and is not a reliable indicator of future results. 4MARKET ENVIRONMENT
Sentiment Stronger for Shanghai and
Shenzhen Exchanges
Exchanges (%)
12 Months Ending 30 Sep 2021
30
20
10
0
-10
-20
-30
-40 — Shanghai Stock Exchange Composite Index
Jan 2021
Jul 2021
Aug 2021
Oct 2020
Nov 2020
Dec 2020
Mar 2021
Apr 2021
May 2021
Jun 2021
Sep 2020
Feb 2021
Sep 2021
— Shenzhen Stock Exchange Composite Index
— S&P BNY Mellon China ADR Index
— Hang Seng China Enterprises Index
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. Past performance does not guarantee and is not a reliable indicator of future results. 5MARKET ENVIRONMENT
Stagflation Appears Transitory
Better vaccines and therapies may ease pandemic lockdowns
China CPI (%)
Five Years Ending 30 Sep 2021
6
5
4
3
2
1
0
-1
Oct 2016
Jun 2017
Oct 2017
Jun 2018
Oct 2018
Jun 2019
Oct 2019
Jun 2020
Oct 2020
Jun 2021
Feb 2017
Feb 2018
Feb 2019
Feb 2020
Feb 2021
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. 6MARKET ENVIRONMENT
GDP Likely to Rebound and Normalize
Economic disruptions are slowly easing
China GDP YoY (%)
Five Years Ending 30 Sep 2021
20
15
10
5
0
-5
-10
Aug 2017
Aug 2018
Aug 2019
Aug 2020
Aug 2021
Dec 2016
Apr 2017
Dec 2017
Apr 2018
Dec 2018
Apr 2019
Dec 2019
Apr 2020
Dec 2020
Apr 2021
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. 7MARKET ENVIRONMENT
Consumers Resilient and Demand Still Intact
Spending should resume as lockdowns ease
China Retail Sales YoY (%)
Five Years Ending 30 Sep 2021
40
30
20
10
0
-10
-20
Jan 2017
Jan 2018
Jan 2019
Jan 2020
Jan 2021
Oct 2016
Apr 2017
Jul 2017
Oct 2017
Apr 2018
Jul 2018
Oct 2018
Apr 2019
Jul 2019
Oct 2019
Apr 2020
Jul 2020
Oct 2020
Apr 2021
Jul 2021
ARTISAN PARTNERS Source: Bloomberg. Data as of 30 Sep 2021. 8MARKET OUTLOOK
Optimism for 2022
Property sector stabilizing
Power grid improving
Regulation favors innovative industries
ARTISAN PARTNERS 9OPTIMISM FOR 2022
Property Sector Stabilizing
Orderly Restructuring Policy Tools Diversifying Economy
Three red lines policy Government usually runs Policy favors innovative
Policymakers focus on budget surplus industries
orderly deleveraging Policymakers have tools that China still has many engines
can be deployed of growth
ARTISAN PARTNERS 10OPTIMISM FOR 2022
Power Grid Improving
2060 Carbon
Neutrality Goals
5-Year Economic Plans
Local Implementation
Course Correction
ARTISAN PARTNERS 11OPTIMISM FOR 2022
Regulation favors innovative industries
China faces big challenges and may need
the private sector to help solve them
Policymakers seek to direct human and financial capital
to innovation—innovative sectors tend to benefit
Companies with marginal impact to
social benefits tend to be disrupted
ARTISAN PARTNERS 12AN UNDISCOVERED UNIVERSE
Small and Midcap Companies
Three Tectonic Shifts
High Earnings, Attractive Valuations
Structural Growth
ARTISAN PARTNERS 13S M A L L A N D M I D C A P CO M PA N I E S
3 Tectonic Shifts
1 Aging Population
2 Growing Health Care Demands
3 Drive for Technology Independence
ARTISAN PARTNERS 14S M A L L A N D M I D C A P CO M PA N I E S
Where We See Opportunities
Millennial Innovative Technology
Consumers Health Care Leapfrogging
ARTISAN PARTNERS 15S M A L L A N D M I D C A P CO M PA N I E S
High Earnings Growth Relative to Large Cap
Earnings Growth (%) ex Financials, Real Estate, Materials and Utilities
FY1 Estimates
Ten Years Ending 30 Sep 2021
100
80
60
40
20
0
— MSCI China SMID Index
-20 — MSCI China Index
Sep 2011
Sep 2013
Sep 2015
Sep 2017
Sep 2019
Sep 2021
— S&P 500® Index
— Russell 2000® Index
ARTISAN PARTNERS Source: FactSet, MSCI and Russell. Data as of 30 Sep 2021. 16S M A L L A N D M I D C A P CO M PA N I E S
Attractive Valuations Relative to Large Cap
Price to Earnings Ratio ex Financials, Real Estate, Materials and Utilities
FY1 Estimates
Ten Years Ending 30 Sep 2021
35
35
30
30
25
20
25
15
20
10
155
0
20212021—8 Sep 2021
2011—30 Sep 2011
2013—27 Sep 2013
2015—23 Sep 2015
2017—18 Sep 2017
2019—13 Sep 2019
10
5
— MSCI China SMID Index
0 — MSCI China Index
2011
2013
2015
2017
2019
7 Sep
— S&P 500® Index
SepSep
SepSep
SepSep
SepSep
SepSep
Sep
— Russell 2000® Index
29
26
22
15
12
ARTISAN PARTNERS Source: FactSet, MSCI and Russell. Data as of 30 Sep 2021. 17S M A L L A N D M I D C A P CO M PA N I E S
Structural Growth Opportunities
Large domestic market
Strong balance sheets
allow self funding
Improving liquidity for small
and medium size businesses
ARTISAN PARTNERS 18China Is the World’s
Second-Largest Equity Market
Representing a large and liquid market, Chinese equities may help capture global growth
New York Stock Exchange Shanghai Stock Exchange
Taiwan Stock Exchange
Total Size of Select Equity
Markets Around the World
Shenzhen Stock Exchange
US $54 Trillion
Greater China $20
Japan $7 Hong Kong Stock Exchange
UK $3.7
Germany $2.9
Taiwan $2
Brazil $1
ARTISAN PARTNERS Source: FactSet. Data as of 1 Sep 2021 19S M A L L A N D M I D C A P CO M PA N I E S
Active Security Selection is Key
Portfolio managers need deep understanding of public policy
Regulatory risks Smaller companies often under less regulatory scrutiny, but risks remain
SASB materiality map can highlight key operational risks
Operational risks Base, bull and bear case scenario explorations
People are often the key assets for innovative companies
Corporate governance risks Look for management teams that can execute across the market cycle
ARTISAN PARTNERS 20Key Takeaways
Market volatility has made valuations more attractive
Outlook for 2022 is optimistic as China’s economy slowly normalizes
Market rebound may favor innovative industries,
especially among smaller companies
ARTISAN PARTNERS 21Notes and Disclosures This section of this presentation contains information important to a complete understanding of the material presented. Please review it carefully. Artisan Partners Limited Partnership (APLP) is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Artisan Partners UK LLP (APUK) is authorized and regulated by the Financial Conduct Authority and is a registered investment adviser with the SEC. APEL Financial Distribution Services Limited (AP Europe) is authorized and regulated by the Central Bank of Ireland. APLP, APUK and AP Europe are collectively, with their parent company and affiliates, referred to as Artisan Partners herein. Form ADV: Additional information about APLP or APUK, the firms, its partners, ownership, investment strategies, fees and expenses and policies is contained in each firm’s respective Form ADV. Each firm will supply a copy of its Form ADV upon request. 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