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Indirect China risk requires perspective

china risk

The indirect China risk of a particular shareholding needs to be measured and should not lead investors to ignore the strengths of a particular company’s fundamentals.

Investors concerned about exposure to the potential political risks associated with China from shareholdings listed on other international exchanges need to look beyond face value for a proper assessment, a global fund manager has advised.

Magellan High Conviction Fund co-portfolio manager Chris Wheldon used his organisation’s investment in Starbucks as an example of how indirect exposure to the risk of China can be accurately determined.

“When it comes to thinking about the China risk associated with the Starbucks investment, that risk comes in two different flavours. The first is the company’s exposure to [China’s] internal domestic policies and it’s our view that on balance Starbucks stands to benefit from China’s redistribution policies, like common prosperity, which will over time support growth in the disposable incomes of the Chinese middle class,” Wheldon said.

“So companies like Starbucks, which cater to that large and growing middle class, stand to benefit on balance from domestic policies.”

According to Wheldon, the other aspect of Starbucks’ China-related risk needing consideration is that from exposure to foreign geopolitical tensions such as any potential conflict between China and the United States.

“This risk is our top focus because Starbucks’ business in China will be impacted if the relationship between the US and China deteriorates to a level where Chinese citizens avoid US businesses and US brands,” he said.

However, he noted no meaningful change had occurred regarding this type of trend in recent times.

He also reminded investors not to let concerns over exposure to China outweigh recognition of the core business strength of a company like Starbucks.

“[The fact is] Starbucks’ US business remains the key profit engine of the company and will remain so for the foreseeable future, and that US business is performing incredibly well and has very healthy prospects,” he said.

“That’s the most important point to make on the Starbucks investment case.”

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