Could China's boom soon turn to bust?
Speculation is mounting that the boom in the Chinese economy will soon turn to bust, with investors nervous of a possible correction in the Shanghai Composite Index after its astonishing rise of 119% over the past year.
But the Sinophile camp has recently been given a boost, with esteemed investment manager Anthony Bolton deferring his retirement to head a new Fidelity portfolio in the area.
Fen Sung, investment manager of Premier China Enterprise fund, says: “People have been talking about a bubble and have focused on the banking and property sectors. But there’s no bubble yet, and the government has tried to make sure it doesn’t happen by being stricter with the banks. China is a decade or two-decade story; it’s moving up the value chain.”
Of course, any emerging market should be treated with caution.
“Investment in China should not be used for income, but for growth,” says Philip Pearson, partner at P&P Invest. “If you’re seeking income from equities you should look at markets with a good dividend yield, such as the UK.”
Pearson advises those who are overexposed to China to reduce their holdings and invest no more than 10% of their portfolio in the area. He says the chance of a bubble remains slim, but if it does happen, it could represent a buying opportunity, as stocks will be cheap in the aftermath.
Charlie Awdry, investment manager of Gartmore China Opportunities fund, thinks the Chinese market is undervalued.
“One of the characteristics of a potential bubble would be extremely high valuations in the property market," Awdry explains. "But there are millions of individual property markets in China – some considered good value and some bad.
"We’re seeing evidence that property prices in big cities such as Beijing might be up 45% to 50%, but that’s not the case in other parts of the country.”
He adds that macroeconomic conditions remain encouraging, with incomes going up, a build-up of savings and high consumer demand – all of which bode well for continued growth.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).