A recent trip to China again reminded my colleague Frances Lim and me why so many investors now consider China the ‘epicenter’ of global macro trends. In addition to accounting for nearly one-third of the global growth, the country is also in a heated trade dispute with the United States. Without question, it is not sitting idle, and we saw visible signs of change in both monetary and fiscal policies during our visit. China is also facing a massive societal change, as its millennial population, which represents the largest in the world, is becoming increasingly influential in terms of what, how, and where to buy. Third, technology is also having a profound impact across a wide swath of Chinese industries — more so than any other country where KKR does business, we believe. Finally, while economic growth appears reasonable, we see major macro divergences occurring at the sector level that could profoundly impact which companies prosper and which ones wither during the next 12-24 months. From an investment standpoint, our trip and our macro research lead us to remain supportive of capital deployment in areas such as leisure, wellness, services (environmental, healthcare and financial), healthy food, and food safety. On the other hand, we left China quite cautious on branded consumer goods, global supply chains, and logistic plays that do not interface with the customer and/or can be disintermediated by the growing influence of Baidu, Alibaba, and Tencent. Finally, we believe now is the time to be thoughtful in terms of allocating to globally integrated industries such as autos as well as high-end technology.
To read the whole report, China: A Visit to the Epicenter, go to the website of KKR.
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