It’s Time to Play Offense

China likely becoming less attractive to Emerging Market Investors, creating an opportunity for LatAm companies

Pardon the title’s sports analogy, but the World Cup ended only a month ago. Congratulations, by the way, to Argentina as well as all the teams that qualified for the tournament, an impressive feat in its own right. China wasn’t one of them, but it’s the subject of our first blog this year.

It’s widely known that China’s government has been gradually assuming greater control of the Sino economy since Xi Jinping became General Secretary of the Chinese Communist party in 2012. Most recently, the country’s securities regulator (CRSC) took steps toward barring so-called “red light” companies – those from sectors the government doesn’t consider strategic – from going public and listing on the Shanghai or Shenzhen stock exchanges. In our view, this marks an inflection point for US, European and other Emerging Market equity investors, as this would directly limit their ability to invest where they would like to in China’s economy.

However, this is not the only measure that could be turning away capital, presenting an opportunity for Latin American companies, including those going public. Another alarming trend has been the government’s broad crackdown on China’s tech sector, recently culminating in Jack Ma, founder of Alibaba, the world’s second-largest ecommerce company, being forced to relinquish control of Ant Group, the fintech arm whose $37 billion IPO was blocked in 2020. Government intervention at one of China’s most successful companies invariably raises concerns that investments can suddenly turn sour.

Also cause for concern among foreign investors was China’s zero-Covid policy, which seriously disrupted the country’s economy as well as the global supply chain. Yet another is potentially worse trade relations with the West (e.g. additional tariffs and stricter technology export controls), due to the government’s hawkish stance toward Taiwan and its support of Russia; consider the withdrawal of corporates and investors from Russia, following its invasion of Ukraine last year. Consequently, companies have been shifting production from China to Mexico and India, among other countries. That’s not to say US and European companies would withdraw entirely from China. Rather, they are diversifying their supply bases geographically. Apple, for example, will move some production of its popular MacBook laptop to Vietnam, following a recent shift of some iPad and Apple Watch production there, while its latest iPhone model is now being produced in India as well. It seems that investor capital will inevitably follow these geographic shifts.

China’s latest policy change is pointing toward more centralized control of the country’s economy, particularly when one considers that General Secretary Xi has begun an unprecedented third term as the country’s president. Any perestroika-like reversal in policy doesn’t seem likely in the foreseeable future. Such a scenario suggests that free-market forces, including where capital is allocated, will increasingly take a back seat in determining a better economic future for China.

In other words, this could mean fewer Alibabas in which to invest, forcing investors to explore other Emerging Markets to deploy their capital with greater certainty. This is a clear opportunity that Latin American companies should seize upon by focusing more of their IR efforts on Emerging Market investors in the US and Europe through effective investor targeting and marketing. We say now is the time to play offense to attract more of these investors in support of your company’s market valuation.

To learn how InspIR Group can help you effectively target Emerging Market investors, please contact the co-heads of our firm’s Investor Access practice:

Priscila Nannetti, São Paulo priscila@inspirgroup.com

Ivan Peill, New York – ivan@inspirgroup.com

 

 

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