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March 2021 investment update

Our March investment update is now available to download.

The cyber security skills gap

The cyber security skills shortage has been making headlines for years, but the Covid-19 pandemic has made it more critical than ever.

Equities | Satellite holdings: EM consumer

Investment outlooks / Q4 2020

Our “EM consumer” theme has been the strongest performer this year so far for a variety of reasons. Firstly, China has been experiencing a faster recovery compared to other major economies, as it was the first country to go through the widespread lockdowns. Secondly, our decision to buy Alibaba and as major e-commerce players in China has turned out to be beneficial. Thirdly, the timing was fortunate as we purchased both stocks after the markets dipped in mid-March. We added positions to Alibaba on 1 April and have not reduced our holding in Alibaba or in JD so far. Our outlook on both companies remains positive and we continue holding both companies in our portfolios.

Click chart to expand. Source: Refinitiv, Datastream, October 2020.

Online retail sales have continued to outpace broader retail sales in China, even as the latter has improved substantially since July and is now back to positive growth. The reason why online sales have slowed in terms of sequential improvement is probably due to consumers anticipating the peak shopping season. At the same time strong pent-up demand in Q2 resulted in a higher base. By category, online food sales expanded the fastest at 35.7% YoY in the 9 months since the beginning of the year. Cosmetics came in second with 13.7% YoY growth, followed by online apparel at 3.3% YoY.

Click chart to expand. Source: National Bureau of Statistics of China, Refinitiv Eikon, October 2020.

Online sales have seen an acceleration across frequency, spending and penetration in China. A recent study of 773 Chinese consumers conducted by CLSA revealed a structural shift toward higher online shopping activity. The frequency of internet shopping increased from 4.8 times per week in 2019 to 5.4 times per week in Q2 2020 nationwide. Tier 1 cities have registered the largest jump from 5 times to 6.1 times, or a 22% increase. In terms of weekly spending, consumers increased the average spending amount from CNY 907 pre-Covid to CNY 1,217 post-Covid, or a 34% increase. Once more, Tier 1 cities have experienced the largest rise (+45%) from CNY 1,164 to CNY 1,693. As a result, the online share of total consumption spending expanded the furthest in Tier 1 cities from 37% to 49%. Among the online shopping platforms, Taobao/Tmall (Alibaba) and were consistently the most popular in China, both pre and post-Covid. 99% of respondents stated they were using Tmall/Taobao, followed by 89% of respondents saying they were using JD.

China not only leads in e-commerce penetration but also creating new ways of online shopping. As an example, livestreaming shopping existed before the pandemic but as many other online activities has accelerated this year. Time spent watching livestreams jumped 45% to an average 1.6 hours per week, leading to an increase in purchases from showrooms. Approximately every fourth respondent purchased products after watching livestreams post-Covid, up from every fifth respondent before Covid-19. Alibaba took the leadership in this area too, with 89% of respondents doing livestream shopping on Taobao Live. JD’s platform was in fourth place with 40% of respondents.

Click chart to expand. Source: CLSA, September 2020.

Chinese cloud demand has accelerated with Covid-19 as businesses accelerate investment in digitisation to keep up with the jump in consumer online activity as well as improve efficiency in the weak economic environment. Higher spending will likely most benefit the largest players, Alibaba and Tencent, as they have the largest ecosystems and best-in-class technology. Cloud migration is also supported by the Chinese government. The National Development and Reform Commission (NDRC) and Cyberspace Administration (CAC) have set up detailed action plans to facilitate a transition to the cloud, where internet platforms will play a key role to support small and medium enterprises (SMEs). These platforms are to facilitate SMEs digitalisation by providing diversified services at low cost and with low entrance barriers. Internet operators are asked to offer free basic services and only charge for value-added services, while the government will provide one-off funding to support at least one-year free or discounted cloud, big data and artificial intelligence services for SMEs. In addition, the government is calling for the industry leaders to partner with financial institutions to offer low-interest loans, lease financing, and insurance for cloud migration.

Click chart to expand. Source: IDC, CLSA, September 2020.

Alibaba has emphasized the significant underspending in IT, and especially in cloud, in the Chinese market when compared to the US. Although the difference in GDP (USD) between two countries is only 1.5 times, total IT spending is only one-third of that in the US, while the public cloud spending is even smaller at just 1/10th of the US, suggesting a large opportunity to narrow the gap. Alibaba noted that the pandemic accelerated cloud investment and expects the market to grow by 28% in the next three years, outpacing the US by 5 percentage points per year.

Click chart to expand. Source: Alibaba Investor Day 2020, October 2020.

Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.

If not otherwise indicated, all graphs are sourced from Dolfin research, October 2020.

For more information please read our disclaimer.

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