The Chinese biotech sector continues to offer massive investment opportunity, despite recent shorter-term headwinds
This past Friday, we learned that the trade war has taken a turn ... toward your portfolio.
Trump administration officials are discussing ways to curtail U.S. investors from sinking money into Chinese stocks. As Bloomberg reports, it's a move "that would have repercussions for billions of dollars in investment pegged to major indexes."
According to sources on Friday, Trump is considering delisting certain Chinese companies from U.S. exchanges, as well as limiting Chinese investments in government pension funds. Apparently, there's also talk of how to put limits on Chinese companies that are included in stock indexes managed by U.S. firms. For now, it's unclear as to how these limits might look.
Of course, as I write Monday morning, the Trump administration is now saying it's "not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time."
***If you're a regular Digest reader, you know that one of the long-term trends we're bullish on is the growth of China
Our expert in long-term trends and thematic investing is Matt McCall.
Matt isn't one of those analysts who does little more than sit behind a desk reading other people's reports. Given this, earlier this summer, Matt was in China doing "boots-on-the-ground" research. The opportunities are so abundant that Matt now has a "China" basket in his Investment Opportunities portfolio, and a "Chinese Biotech" basket in his Early Stage Investor portfolio.
Matt is so bullish on Chinese biotechs that he's even called them "an investment that may have the biggest upside potential I have ever seen."
With this in mind, I reached out to Matt last Friday for comment about the news from the Trump administration. His take was that while Trump is certainly a wildcard and you don't know what he's going to do, this latest move is most likely posturing.
From Matt:
This back-and-forth will not end until a deal is done. But it will eventually get done. So, if you are a long-term investor, just ignore the noise and buy the dips. Given Trump's apparent reversal this morning, it seems Matt was spot on. Of course, it's certainly possible that heightened trade war tensions could put this option back on the table. But for now, "buy the dips" is the working game-plan. ***Turning specifically to Chinese biotechs now, as to why anyone would want to "buy the dips," there's one great reason -- government-subsidized growth
It's actually more than "growth," it's explosive growth.
Here's the quick backstory as Matt has previously explained it ...
In 2017, the Chinese government announced that its domestic biotechnology sector should make up 4% of the country's GDP by 2020 -- which is projected to be roughly $15.7 trillion.
When this announcement was made, China's biotech industry was generating revenues of $5.4 billion. In order for biotech to make up 4% of the economy by 2020, it must increase its sales 116-fold.
It turns out, Matt's September issue of Early Stage Investor was all about Chinese biotechs. So, in light of the news from the White House, let's get Matt's most recent thoughts on this sector -- it's one that Matt is saying "could be the single most overlooked investment theme of not just the decade, but the century."
***History doesn't repeat itself, but it often rhymes
Matt begins his most recent issue by providing a benchmark for investors in helping them understand just how big the opportunity is.
For example, the first biotechnology company to trade on a public stock exchange was Genentech, back in 1980. If you invested in Genentech on its opening day and held until the company was sold in 2009, you would have earned 157X your money.
Then there's Amgen. It went public in 1983 for $18 per share. Matt tells us the stock has since gone through five stock splits and started paying dividends in 2011. Factoring all that in, an initial $10,000 investment would have turned into $7.14 million.
Or take Celgene. From the end of October 1987 through its high in 2017, the stock would have returned 420X your money.
Here's Matt on the takeaway:
I think you see the pattern here. You can make big money investing in early stage biotech companies that are discovering world-changing drugs in a country that embraces medical breakthroughs.
That was the United States then. Today it is China.
The biotech landscape in China reminds me very much of the blooming U.S. biotech sector in the 1980s and 1990s. The upside potential is so enormous that when I say it out loud or type it, a grin spreads across my face.
***A temporary lull in the Chinese biotech IPO market
In the first half of 2019, five of the 10 largest biotech IPOs in the world took place in China. The sixth does business in both China and the U.S. That's a pretty impressive sign that Beijing's plans are coming to fruition.
Here's Matt's take:
This is amazing considering that Chinese biotech IPOs were not even possible just 18 months ago. They quickly started dominating the world markets.
This is just one more sign that when the Chinese government gets behind an idea or trend, it will be successful. However, in recent months, the plan to boost China's biotech companies through IPOs has hit a speedbump. Matt explains that the trade dispute between the U.S. and China has held back funding of new deals in both Mainland China and Hong Kong. Plus, the protests in Hong Kong which were all over the news have been an even bigger deterrent.
From Matt: Nervous big money has pulled back from funding new IPOs in the country. It is common for deal flow to slow during the summer anyway in Asia and around the globe, but this year's slowdown was exacerbated by the protests.
There has not been an IPO in Hong Kong since mid-July. Companies raised only $1.54 billion via IPOs since the beginning of that month, which is just 13% of the $11.5 billion raised during the same time frame last year. But it's important to remember the difference between a long-term eventuality and short-term set-backs. Specifically, if Beijing has decided that it's going to throw its weight behind the biotech sector, then it's going to happen. So, these short-term speedbumps shouldn't affect an investor focused on the bigger picture.
Back to Matt: The current lull in Chinese biotech IPOs will be temporary. We will again see more companies going public. You will not hear about them in the media. And you may not even be able to find any reliable information on them on the internet.
But that's all great for us.
***It's important to remember to keep the correct perspective -- not just on these Chinese biotechs -- but with investing in general
Pulling back for a moment, let's leap-frog from the lull in Chinese biotechs to a broader point about investing.
In Matt's most recent podcast, he interviewed Meb Faber, a successful money manager and quant investor who I actually worked with for several years.
Matt asked Meb to give some advice based on how he spent the last decade to get to where he is today -- it wasn't a question solely focused on investing, but also entrepreneurship.
From Meb:
The challenge of just showing up every day is underrated. The ability to just show up and do work and continue to plug along ...
Trying to take the long view, which is hard. And it applies to the markets, too. It's so easy to focus on what's going on today, but we look back over the past 10 years and it's hard to even remember half of the things that worried us as investors or got in the way of some of these opportunities.
The behavioral, psychological challenges of trying to be a long-term thinker -- both with entrepreneurship as well as investing -- is really important, but it's really hard. This is a great piece of advice that investors must remember. Whether we're investing in Chinese biotechs that are going through a lull, marijuana companies that are experiencing a sector-pullback, or any thematic investment that's facing a shorter-term headwind, how do you respond? Do you focus on the big picture, or get caught up in the fear and anxiety of the immediate (but temporary) challenge?
From Matt: I was nodding my head the entire time Meb was speaking. And it's fantastic advice ... It's nice to finally hear someone who's on the same page as us, ignoring the day-to-day noise and focusing on the long-term, big picture mega-trends with the potential to fuel life-changing profits. Circling back to Chinese biotechs, the opportunity is enormous. It's Matt's job to find the ones most likely to be tomorrow's Genentech, Amgen, or Celgene ... but it's our job to demonstrate the patience and perspective to allow those growth stories to play out.
As an investor, what are you focusing on?
Have a good evening,
Jeff Remsburg
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