Identifying and investing along powerful growth themes is a critical part of how our Calamos Global Equity team builds portfolios. We have written extensively over the years about how disruption across industries and regions can create opportunities and risks, and how we focus our analysis to position portfolios to be on the correct side of the disruption. There was no better example of how disruption influences investment opportunities than in 2020, when Covid-19 accelerated many secular growth themes by several years with extreme impacts for businesses—both those favorably and unfavorably exposed.
More often than not, particularly in developed markets, growth themes arise organically, formed by the “invisible hand” of the market economy. Government policies can also influence growth; tax, regulatory, trade, and budgetary policies serve as prime examples. But these tend to develop more slowly and are less frequently implemented, particularly in democratic systems.
However, China is different. The country does benefit from many of the same growth themes found in developed markets, but government policy has a much more prominent role in shaping the economic landscape. As opposed to more market-oriented systems found in most developed markets,
China’s one-party bureaucratic-authoritarian system, led by the Chinese Communist Party, is a very “visible hand” that influences most aspects of economic activity. The CCP, which turns 100 this year, has controlled the country since the founding of the People’s Republic of China in 1949. Under its authority, policies can be formed and implemented swiftly, with significant impacts on China specifically as well as across the world.
There is a great deal of strategic rivalry between China and the West, particularly the U.S. We are adherents of the free market system, but addressing these issues is not the purpose of this piece—we want to focus on how China’s policies arise and impact the environment for emerging market and global investing.
As investors, understanding the CCP’s ultimate objective for a particular area of the economy helps us avoid being exposed to the wrong side of policy disruption and also find industries and companies that stand to benefit. This begins with the recognition that a core objective of the CCP is to retain its role as the single party in the system. The way to achieve this objective is by maintaining social stability, often through benevolence and sometimes not. If the population is well-employed and seeing incomes, purchasing power, and overall living standards improve, the likelihood of widespread unrest is low. Through this lens that we can begin an assessment of which policies might be prioritized and why, and the risks and opportunities that may arise across the investment landscape as a result.
In our “Visible Hand Series,” members of our Calamos Global Equity Team will provide our perspectives on several significant Chinese policy initiatives currently in focus, including the private education industry, digital currencies, and anti-monopoly campaigns. We look forward to discussing why these policies matter to investors, and where we see opportunities for our portfolios.
Our first case study, “The “Visible Hand,” Part 2: How Beijing’s Education Policy Is Reshaping Investment Opportunity,” explores the recent slide in Chinese after-school tutoring stocks. This once-lucrative industry has come under the pressure of new government regulations that we believe are motivated by Beijing’s commitment to bolstering broader economic and societal goals, such as population growth and social equality.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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