Marketing material for professional investors or advisers only.October 2020

China: Past its peak? Or starting a new growth phase?Stephen Kam, Investment Director

China – the bigger picture

China’s old growth model has largely run its course

2

Chinese credit outstanding, % of GDP1

Debt levels and past boom mean investment is in secular decline

Capital spending share of GDP2

Source: BIS, NBER, Minack Advisor’s April 2020Source: IMF, China, NBS, Cabinet Office, Minack Advisors, April 2020

Future growth relies on productivity and services

3

China: Potential growth, productivity & population1

Source: NBS, UN, Minack Advisor’s April 2020Source: NBS, OECE, NBER, Minack Advisors, April 2020

China share of GDP2

China needs to focus on improving productivity and drive its service industry

China today

4

Implementing new, efficient technologies fast

Source: Schroders as at August 2019

Digital innovation

With no legacy systems to hold them back, world leaders in e-commerce volumes, mobile payments and 5G technology

China today

5

Productivity driven by automation, robotics and IT

Source: Schroders, Reuters as at August 2019

No longer just a low value manufacturer

Made in China 2025 plan calls for Chinese industrial robots to make up half of the domestic market by 2020 and 70% by 2025

China today

6

Urbanization continues to drive growth and development

Source: Schroders as at August 2019

Focusing on economic collaboration

Infrastructure investment into development of city clusters and smart cities to boost productivity and incomes.

11 591

3 733

979

768

621

China*

United States

Japan*

United Kingdom

Korea

Why China works

7

China’s number of new graduates per year far exceeds that of key developed countries1

1Source: World Bank, Morgan Stanley Research. Note: 2013-2017 data for China and 2012-2016 data for the other countries. 2013-2016 average data for Japan because of missing data for 2012, October 20192Source: Ministry of Education, NBS, Morgan Stanley Research, October 2019. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

More and more young people are graduating from college2

Annual Average No. of Graduates from Tertiary Education (Thousand People) Tertiary Graduates / Births 22 Years Ago

Well educated work force forms a strong base for development

Why China works

8

China - R&D Spending (US$ bn) (% of US & Euro)1

1Source: OECD, Macquarie Research, September 20192Source: Wu, Hao (2018) Intangible Investment by Industry in China, CEIC, Macquarie Research, September 2019

China – Intangible asset (Rmb m) (% GDP)2

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

300

350

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

China (US$ bn) China % of US China % of Eurozone

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

1995 2000 2008 2013

Intagible Investment Intagible Investment as % of GDP

As % of GDPRMB mn

Continued investment into R&D

Why China works

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Significantly shorter travel times in China's key city clusters than other developed countries1

1Source: Morgan Stanley Research, October 20192Source: PWC Global Consumer Insight Survey 2019. *Share of mobile payment in total purchase, October 2019

…..and mobile payment2

0,0

0,5

1,0

1,5

2,0

2,5

3,0

SF-Pal Alto(Train)

HK -Shenzhen

CBD (HSR)

NYC -Stamford

(Car or Train)

Guangzhou -Zhongshan

(HSR)

London -Birmingham

(VirginTrains)

Shanghai -Hangzhou

(HSR)

Tokyo -Osaka

(Shinkansen)

Shanghai -Hefei(HSR)

~45KM ~60KM ~160KM ~400KM

86%

54%

46%

45%

34%

Mainland China

Hong Kong SAR

Singapore

Russia

Global Average

(Hrs) Comparing Travel Time Between Major Cities

Mobile payment penetration rate*, 2019

Efficiency and connectivity provide the ingredients

10

Source: Schroders

Key concerns on China

US-China tensions – not purely just trade conflicts, but ideological confrontation

High debt situation – repairing China’s balance sheet will take time

Structural reforms – more resources allocating to private instead of public, liberalization of industries, SOE reforms

Demographics – can productivity gains offset deteriorating demographics?

Managing stable currencies – balancing the impossible trinity

10

The opportunity in Chinese equities

11

USA, 56% Japan, 7% United Kingdom, 5%China, 4% France, 3% Canada, 3%Germany, 3% Switzerland, 3% Others, 17%

China, 34% Korea, 12% Taiwan, 12%India, 9% Brazil, 7% South Africa, 5%Russia, 4% Mexico, 3% Others, 15%

China is punching below its weight

12

Source: MSCI. Percentage weightings as at 31 December 2019. Refinitiv, World Bank WDI, at December 2019. Countries shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy

MSCI AC World index country weights

MSCI Emerging Market index country weights

China

China

MSCI AC Asia ex Japan index country weights

China GDP (% world)China GDP per Capita China Market Cap (% GDP)

China, 40% Korea, 14% Taiwan, 14%India, 10% Hong Kong, 10% Singapore, 4%Thailand, 3% Indonesia, 2% Others, 3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

0

2 000

4 000

6 000

8 000

10 000

12 000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

0%

20%

40%

60%

80%

100%

120%

140%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

China

0

20

40

60

80

100

120

140

160

180

200

Dec

-14

Jun-

15

Dec

-15

Jun-

16

Dec

-16

Jun-

17

Dec

-17

Jun-

18

Dec

-18

Jun-

19

Dec

-19

Jun-

20

+US$15bn +US$9bn

+US$50bn

+US$30bn

+US$45bn

MSCI A share Inclusion

37,4%

5,1%

57,5%

31,1%

21,2%

47,7%

China China A-Shares Others

Northbound flow into China A shares1

But this is about to changeContinued interest into A-share market with inclusion into globally followed indices

1Source: Bloomberg, Goldman Sachs, August 2020

Cumulative Northbound buying (US$bn)

13

MSCI Global Emerging Markets Index2

2Source: MSCI, Factset, data as of Aug 2020

Full inclusion

Aug 2020

YTD+US$18bn

The China equity universeCombined market cap of over US$10trn, with over 4,500 listed companies

Source: Wind, FactSet, GS research. Data as of January 2020. sectors shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy

Shanghai, Shenzhen (onshore)• A-shares, B shares• US$8.7trn market cap• US$67.3bn daily turnover (A shares)

Hong Kong (offshore)

• H-shares, Red chips, P chips, HK shares• US$3.9trn market cap• US$6.7bn daily turnover

US (offshore)• ADRs• US$1.0trn market cap• US$6.0bn daily turnover

US listed ADRs

Red-chips

P-chips

H-shares

B-shares

A-shares

0% 20% 40% 60% 80% 100%

Financials Real EstateEnergy Consumer StaplesUtilities Consumer DiscretionaryIndustrials Health CareMaterials Communication Services

Market cap breakdown by sector

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Source: Wind, CICC Strategy Research. Data as of July 2020.

The China equity universeA plethora of opportunities from “A” to “P”

Source: Source: Wind, CICC Strategy Research. Data as of July 2020. Sectors shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy.

A-shares B-shares H-shares Red-chips P-chips US listed ADRs

Definition

Chinese securities incorporated in Mainland China, listed in China

Chinese securities incorporated in

Mainland China, listed in China

Chinese securities incorporated in Mainland

China, listed in Hong Kong

Chinese companies incorporated in Hong Kong, but whose primary business

interests are in mainland China

Shares of companies that are controlled by mainland Chinese individuals, with a

majority of their revenue or assets derived from mainland China

Shares of Chinese companies that are

listed in US

Stock Exchange (currency) Shanghai (RMB)Shenzhen (RMB)

Shanghai (USD)Shenzhen (HKD) Hong Kong (HKD) Hong Kong (HKD) Hong Kong (HKD) NYSE/NASDAQ

(USD)

Market Capitalisation (USDbn) 10,827 18 778 624 1,537 2,110

Number of Stocks 3,890 97 283 177 701 257

0200400600800

1 0001 2001 4001 6001 8002 0002 200

A-shares B-shares H-shares Red-chips P-chips US listed ADRs

Financials Real Estate Energy Consumer Staples Utilities Consumer Discretionary Industrials Health Care Materials Communication Services Information Technology

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Chinese equities – A-share market completes the picture

16

Access to A-shares opens opportunities in unique sectors and stocks

Source: MSCI, Schroders. Sectors shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy.

Domestic A-Shares

HK listed H Shares, Red

Chips, P Chips

US listed ADRs

AllPharmaceutical

Domestic consumption

Financials

LeisureTechnology

Electric vehiclesWhite liquor

MediaMilitary

Niche mid-cap

Internet/EcommerceEducation

Travel/Hotels

HK conglomerateMacau gaming

Dividend yield stocksGlobal consumption

Hong Kong ExchangesInternational banks

Telecom

China A – an attractive opportunity for active managersEven the median manager has been able to add alpha

Source: Schroders , Mercer, as at March 2020.Source: Morningstar, as at 31 August 2020Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise.

Return by Calendar Year

3,3

39,8

15,3

-9,6

49,3

-24,2

42,0

1,0

46,9

7,2

-19.0

20,5

-32,9

37,8

4,08,3

-7,6

1,1

54,3

-18,8

23,7

-40

-30

-20

-10

0

10

20

30

40

50

60

2013 2014 2015 2016 2017 2018 2019

Retu

rn (

% in

USD

)

MSCI China A Mercer Peer Group Median MSCI China A Onshore MSCI China Index

17

China - Near term outlook

18

China markets have outperformed the region

19

Source: FactSet, MSCI, Schroders, 31 August 2020. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Countries shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy.

Year-to-date performance of major markets in Asia Pacific region

-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

MSCI China A Onshore

MSCI China

MSCI New Zealand

MSCI Taiwan

MSCI AC Asia Pacific ex JP

MSCI Korea

MSCI Hong Kong

MSCI Malaysia -EM

MSCI India

MSCI Australia

MSCI Indonesia

MSCI Singapore

MSCI Philippines

MSCI Thailand

China economy steadily normalizing

20

Manufacturing steady, infrastructure picking up, consumption recovering

Source: NBS, Morgan StanleySource: CEIC, Wind, STR, CPCA, Morgan StanleySectors shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy

Continued service consumption recoveryBroad based economic recovery

US-China tensions likely to persist

21

Focus has moved from trade to technology, and more recently capital flows

Source: Bloomberg, Goldman SachsSource: Goldman Sachs, Reuters, Schroders , data as of 14 May 2020 (companies in bold have already completed secondary listing)Companies shown are for illustrative purposes only and are not an offer, solicitation, recommendation or advice to buy or sell any financial instrument/securities or adopt any investment strategy.

US-China tensions barometer (GSSRUSCN) ADRs can consider secondary listings in HK/China

Company Ticker GICS Sector Mkt Cap (US$bn)

Baidu BIDU US Communication services 33.2

JD.com JD US Consumer discretionary 71.9

NetEase NTES US Communication services 48.0

New Oriental Education EDU US Consumer discretionary 19.0

TAL Education TAL US Consumer discretionary 20.4

Yum China YUMC US Consumer discretionary 18.4

Trip.com TCOM US Consumer discretionary 14.0

Pinduoduo PDD UW Consumer discretionary 72.8

Vipshop VIPS US Consumer discretionary 11.2

Momo Inc MOMO US Communication services 4.4

China valuationsLockdown winners trading at historic highs, while cyclical sectors trading near lows

CSI300 current PE vs. 5-year average

22

MSCI China current PE vs. 5-year average

Source: FactSet, I/B/E/S, CSI, Wind, Goldman Sachs, data as of August 2020. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise.

14,9

42,4

30,727,3 27,2

23,8

11,1 11,0 10,310,0 9,3 8,1

5,5 4,50

10

20

30

40

MXC

N

Hea

lth C

are

Cons

Dis

c IT

Stap

les

Com

m S

vcs

Div

Fin

anci

als

Mat

eria

ls

Ener

gy

Indu

stria

ls

Util

ities

Insu

ranc

e

Real

Est

ate

Bank

s

12M forward P/E (X) +/- 1 Std.dev. CurrentHigh/low

5 years historical data used

14,4

45,734,2

29,527,3

21,417,9

16,614,8 13,5 12,0 9,4

5,9 5,50

10

20

30

40

50

CSI3

00

Hea

lth C

are IT

Com

m S

vcs

Stap

les

Div

Fin

anci

als

Cons

Dis

c

Mat

eria

ls

Util

ities

Indu

stria

ls

Ener

gy

Insu

ranc

e

Bank

s

Real

Est

ate

12M forward P/E (X) +/- 1 Std.dev. CurrentHigh/low

5 years historical data used

Key ideas

23

Sector views

Source: Schroders. For illustrative purposes only and does not constitute any recommendations to invest in the above-mentioned markets

Sector Rationale

Consumer discretionary Domestic Chinese consumer businesses and Hong Kong consumer goods companies with strong brand value and pricing power (consumption upgrading)

Internet Online businesses which are benefiting from the rapid shift in activity from offline to online, which has accelerated on the back of Covid

Technology hardware Select tech hardware names and 5G infrastructure plays

IndustrialsElectric-vehicle related stocks and machinery companies benefiting from 1) supply chain localisation in China and 2) the pickup in infrastructure investment we will likely see in 2H

Energy and banks Underweight oil & gas (challenging demand-supply outlook) as well as banks (NIM pressure and NPL risks)

Important information

For professional investors and advisers only. The material is not suitable for retail clients. We define "Professional Investors" as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries.

This information is a marketing communication. This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Information herein is believed to be reliable but we do not warrant its completeness or accuracy. Any data has been sourced by us and is provided without any warranties of any kind. It should be independently verified before further publication or use. Third party data is owned or licenced by the data provider and may not be reproduced, extracted or used for any other purpose without the data provider’s consent. Neither we, nor the data provider, will have any liability in connection with the third party data. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.

Any references to securities, sectors, regions and/or countries are for illustrative purposes only. The views and opinions contained herein are those of the authors, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Past Performance is not a guide to future performance and may not be repeated.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors.

Issued in October by Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998.

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