Over the past 12 months, Justin Leverenz, portfolio manager of our Developing Markets Fund, has been speaking about misconceptions related to the Chinese economy. In Justin’s mind, the underperformance of the broad Chinese market in the past three years, largely driven by a fixation on macro uncertainties, has created some great entry points into companies where he continues to see strong structural growth potential.
It’s always interesting to hear what Justin has to say about China and the opportunities there, but it’s fascinating to see him on the ground, in another country, at work. Recently I traveled with Justin to China on one of his frequent research trips (in the past year he’s traveled across Asia, Latin America and Europe). Justin’s particular bullishness on Chinese equities is rooted in his extensive experience in the market, intensive on-the-ground research and a long-term investment philosophy. That focus was evident in all of the meetings we attended. It was also clear that Justin’s fluency in Mandarin, made possible by living and working in Asia for more than 10 years, is a competitive advantage when doing business (and trying to catch a train) in China.
Traveling with Justin and Heidi Heikenfeld, an analyst on our Emerging Markets Equity team, gave me an even better appreciation of how diligently our teams work to find the best investment opportunities for our clients. In five days, we traveled to Bejing, Tianjin, Weihai, and Shanghai to meet with companies across a variety of industries, including finance, real estate, energy and healthcare.
Bill Glavin, right, and Justin Leverenz visiting Shandong Weigao, a company that produces and sells orthopedic, blood purification, and single-use medical products in China.
We also met with several consumer-oriented companies. I got to see first-hand the powerful story behind the Chinese consumer and how increasing market penetration can open up a world of opportunities for both domestic and foreign companies. One of those companies is very familiar to Americans. Yum! Brands, owner of KFC, Pizza Hut and Taco Bell, gets about half of its sales from China.1 The Chinese fast-food industry is estimated to be worth $14 billion and Yum! has built an estimated 39% market share2 as consumers gravitate towards branded chain restaurants.
A similar story is at play in the travel industry, where current penetration rates of branded hotels are low, at just 21%, but growing.3 Travel spending in China is just 4% of GDP compared to 18% in the U.S.3 There’s a lot of room for growth.
One of the highlights of the trip for me was meeting with Chinese artists. In China, as in many places, artists are often at the forefront of change. Having the opportunity to not only see their work but also to engage in conversation with them gave us some insight into the evolving shape of Chinese society and the future of the Chinese economy.
Justin Leverenz, Bill Glavin, and Beijing-based artist Yue Minjun, looking at Yue’s sculpture, “Frozen in Laughter.” Yue emerged in the wake of the Tiananmen Square incident as a pioneer of Chinese contemporary art and founding member of the “Cynical Realism” movement.
This trip brought to life one of my favorite quotes from our founder, Leon Levy – “Let’s take a different look at the familiar.” Slowing growth and ghost cities in China have gotten a lot of ink over the past couple years. I believe that taking a step back and looking at China, and other emerging markets, from a different perspective allows us to stay a step ahead.
1. Yum! Brands, 2012 Annual Report.
2. Euromonitor International: Fast Food In China, September 2012.
3. Credit Suisse: Home Inns, March 2013.
The mention of specific companies does not constitute a recommendation on behalf of the Fund or by OppenheimerFunds. As of 5/31/13 Oppenheimer Developing Markets Fund had 0.68% of its assets invested in Shandong Weigao and no assets in Yum! Brands. Holdings are subject to change and are dollar weighted based on assets.