Investment briefing: China

Published by Rob Griffin on 05 October 2016.
Last updated on 05 October 2016

Sunny Shanghai

The country now boasts a population of more than 1.3 billion, has recently become the second largest economy on the planet, and is busy establishing itself as one of the most important trading players on the world stage.

It has become a global manufacturing hub with a huge number of goods, including textiles, televisions and washing machines being sold across the world. It is already the European Union’s biggest supplier of goods, which is no mean feat.

But while China is undoubtedly a major player with huge potential, such qualities don’t automatically make it a great investment. In fact, it is likely to remain a very volatile area of the world as it continues to develop over the next few years.


"Rapid economic ascendance has brought on many challenges"

In many ways, China remains a developing country, according to the World Bank, which points out that its per capita income (the average income earned per person) is still a fraction of the level in advanced countries, while its market reforms are incomplete. “Rapid economic ascendance has brought on many challenges, including high inequality, rapid urbanisation, challenges to environmental sustainability, and external imbalances,” it states.

For China’s growth to be sustainable there needs to be policy changes to address environmental and social imbalances, as well as setting targets to reduce pollution and improving access to education and healthcare. All are issues being tackled.

Its rate of growth, however, remains the primary concern. In fact, the announcement that its economy only grew at an annual rate of 6.7% in the first quarter of this year has caused anxiety within financial markets.

Craig Botham, emerging markets economist at investment house Schroders, acknowledges that China did better than expected in the first half of the year, supported by successful stimulus efforts, but suggests this looks unsustainable. “A deceleration already appears to be under way, although we do not believe a hard landing is on the immediate horizon,” he says. “In the near term, the state has sufficient resources to contain any flare-ups in the economy or financial system.”

Over the next three years, he’s less sanguine and is forecasting GDP growth of 6.4% in 2016 and 6.2% in 2017.

However, Mike Kerley, director of Pan Asian Equities at Henderson Global Investors, believes a degree of perspective is needed. He points out that even at 6% China would still be growing faster than most of the rest of Asia. “Roughly 40% of Asia trade goes through China, so it is very significant and its economic growth will continue to be important – especially for economies reliant on intra-regional trade,” he says.


China investors have been rewarded over past year

The reluctance of UK investors to embrace the country is illustrated by the fact they have only invested £2 billion in the IA China/Greater China sector, compared to the eye watering £162.1 billion that has been ploughed into IA UK All Companies.

However, those who have bought into China have been rewarded over the past year, as the sector is the fifth best performer out of 32 with an average return of 35.69%, according to Morningstar data to 23 September 2016.

Despite a difference between the best and worst performers, as is the case in most sector, all of its 34 funds have made money. The top ones have returned more than 50%, while even the worst have still made it into positive territory.

Adrian Lowcock, investment director at Architas, expects China will eventually surpass the United States as the world’s largest economy, but warns that it will remain an emerging area until business and market standards improve.

As a result, he suggests the country needs to be treated with caution by most people. In fact, some people should only have access to China as part of a broader global emerging markets fund. “Investing in a single emerging market, whether that’s China, Vietnam or anywhere else, comes with more risk because you don’t have the ability to move money into another market if you think there’s a better opportunity,” he explains.

The final decision will depend on your attitude to risk, your financial goals and investment time horizon. If you are a very long-term investor, for example, it may make sense to have at least some exposure to this part of the world. “The benefit of buying a pure China fund is you get 100% exposure to the country so if the market does well then you will as well,” Mr Lowcock adds. “However, the downside is more volatility and no hiding place if the market or outlook deteriorates.”

One to watch: Henderson China Opportunities

Henderson’s China Opportunities fund, which was launched back in the early 1980s, has the objective of providing long-term capital growth by investing in both Hong Kong and Chinese company shares.

The portfolio, which is only meant to be a component in a diversified investment portfolio, is designed to capitalise on the growth of what is seen as a dynamic and constantly evolving Chinese economy.

Its manager, Charlie Awdry, has more than a decade of experience investing in China equities. Having worked on the fund since 2003, he took over as lead manager three years later and is assisted by May Ling Wee.

The fund provides diversified exposure to the Chinese market, embracing both companies based in China as well as those based elsewhere that generate a significant portion of their revenue from the country.

It currently has 37 holdings, while the top 10 positions account for 56% of assets under management, according to the most recent fund fact sheet. The largest position (9.9%) is in Tencent, the prominent internet service portal in China.

Mr Awdry maintains that the fact investors are nervous about China’s macroeconomic adjustment provides the chance to make money. “This is depressing Chinese stock valuations, providing opportunities to find attractive, consumer-oriented growth companies for the long term,” he says.

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