Should investors turn their attention back to China?

24th January 2013

The bull-bear debate surrounding the future of China has raged on for decades – but despite a rocky few years it remains on course to take the crown as the world’s number one economy, and many investors are returning to profit from its potential.

China’s stock market performance was dominated by a slowdown over recent years, with its Far Eastern promise failing to live up to expectations that it would avert the impact of the financial crisis.

In particular 2011 proved a disappointment, with China recording the worst performance of all investment sectors, falling by 21.9 per cent, with Anthony Bolton’s Fidelity China Special Situations investment trust sinking by a hefty 37.9 per cent. However, the sector picked up last year, returning 13.3 per cent, while Bolton's trust rose by 16 per cent.

Patrick Connolly, certified financial planner from AWD Chase de Vere, says: “Continued talk of a slowdown in the Chinese economy, coupled with global issues in Europe and the US in particular, have proven an ongoing drag on stock market performance – but that could be changing.

“We are getting more positive economic indicators from China, coupled with more bullish statements from Europe and the US, and this has been reflected in a bounce back in share prices, with Chinese funds recording the best return of all sectors in the past three months.”

According to data form the National Bureau of Statistics of China, the country’s gross domestic product (GDP), rose to 7.9% in the fourth quarter of 2012, from 7.4% in the third quarter and above the expectation of 7.8%. So the anticipated hard landing appears to have been avoided.

Tom Stevenson, investment director at Fidelity Worldwide Investment, says: “Amid all the soul-searching about whether China was to be the new Japan – on the cusp of a prolonged stagnation driven by anaemic consumption and a rapidly ageing population – it is important to remember that, relatively speaking, China is still the humming engine of the global economy.”

However, the challenge this year will be to prevent overheating while still promoting growth, according to the head of China’s National Economic Research Institute.

Fan Gang told a session on China’s growth prospects at the World Economic Forum this week that the economy should grow faster in 2013 than it did last year, supported by plans for infrastructure spending.

The anticipated recovery will coincide with China's new leadership, as Vice President Xi Jinping was chosen in November to succeed President Hu Jintao as party leader, taking over the presidency this spring.

 Meanwhile, investors are returning to China to take advantage of the favourable long-term outlook, says Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

He says: “There are signs that investors are returning to China, with Blackrock – the world’s largest asset manager – boosting its presence in the country to m
eet demand from discerning investors who want a more than just exposure to the country, and are looking for good stock selection.”

Blackrock has hired Hsueh-Ming Wang, a former Goldman Sachs partner with ties to China’s senior financial leaders, towards accomplishing this aim, alongside setting up strategic partnerships with Bank of China Investment Management, Citi and HSBC, to work on selling funds within the country.

Over the past year China has been keen to attract foreign investment, with regulators undertaking a series of initiatives including urging listed companies to pay bigger dividends to shareholders.

The backdrop to this looks positive with the consensus among experts that the Chinese government remains in better financial shape than Western counterparts.

Lowcock says: “It has more flexibility to stimulate or slow growth when necessary. When growth slowed too much in the first half of 2012, for example, interest rates were reduced to encourage lending and investment. This fed through to the property sector, with construction, house prices and sales volumes improving. Infrastructure spending was also increased with heavy investment in railways.”

However, it’s vital to remember that China is reliant on exports and investment, and, of course, it remains exposed to the ups and downs of the global economic cycle.

Connolly warns: “The growth will continue to be coupled with high levels of risk and volatility, so investors need to think carefully before piling into this region.”

One option is to spread risk is picking a broad-based emerging market fund, which invests across the region, but with a significant weighting in China.

Good options, according to Connolly, include JPM Emerging Markets, which currently has 22% in China, its highest ever weighting, and Schroder Global Emerging Markets, with 18% in China. 

Lowcock favours the First State Asia Pacific Leaders fund, managed by Angus Tulloch and Alistair Thompson. He says: “They believe buying quality business franchises with robust balance sheets, run by excellent management and not overpaying for them, will generate strong long-term returns.”

Major recent purchases by the fund included Li & Fung, a Hong Kong-listed consumer business, as its share price fell on the back of economic woes in Europe and the US; and Cathay Pacific, a well-managed airline trading on attractive valuations.

 Since the launch of this fund in December 2003 it had grown by 298 per cent compared with 183 per cent for the average fund in the sector.

A riskier approach could be achieved through the Jupiter China fund, says Lowcock, managed by Philip Ehrmann. “The fund has a bias towards mid and small sized companies – an area which has caused the fund to underperform as it has been a weak market so far,” he says.

However, Ehrmann continues to focus on China's on-going reforms and sees opportunities in areas such as environmental and automation technology, bio-technology and infrastructure construction, which are central to the government's latest Five Year Plan. He also favours consumer stocks, especially retailers, as he expects them to benefit from rising disposable incomes.

This year will prove interesting for those taking a punt on China, as it will show if the country’s central government and banking system can work together to maintain growth while avoiding heavy borrowing and overheating of investments.



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