After a challenging year for the China equity market in 2018, many investors would be forgiven for giving it a wide berth this Chinese New Year.
The ongoing trade spat with the US made it a difficult year for investors as the threat of additional tariffs and the prospect of retaliation clouded the business outlook.
As such, last year the MSCI China index fell by 13.83 per cent in sterling terms, compared with a 3.04 per cent fall for the developed markets-focused MSCI World benchmark, as the below chart shows.
Performance of indices in 2018
Source: FE Analytics
“This Chinese New Year takes place against the backdrop of a more challenging period for China,” said Bestinvest managing director Jason Hollands.
“While the Chinese economy has ascended to become the second largest economy on the globe, as measured by GDP, the data coming out of China over several months has been disappointing.”
However, avoiding the world’s second largest economy completely may be a wrong move in the long term and with the Year of the Pig now upon us – traditionally a lucky symbol – last year’s woes could offer some attractive valuations.
“The fear is that China has become such a powerhouse, that any drop in demand could have a very significant impact on the rest of the global economy. So, the world is watching closely,” said Darius McDermott, managing director of FundCalibre.
“But, if you take a closer look at the data, it is not quite as bad as it may first appear.”
For investors still undeterred, there are a number of different ways to gain exposure to the Chinese market.
McDermott said FundCalibre has three preferred China-focused funds: First State Greater China Growth, Invesco Hong Kong & China (UK) and investment trust Fidelity China Special Situations.
The first fund on McDermott’s list is First State Greater China Growth, highlighted by an FE Trustnet study along with Invesco Hong Kong & China earlier today. It is run by FE Alpha Manager Martin Lau and co-manager Sophia Li.
Since launch in 2003, the £442.3m fund has made a total return of 782.2 per cent compared with a gain of 377.9 per cent for the average IA China/Greater China fund and a 358.71 per cent return for the MSCI Golden Dragon benchmark. It has an ongoing charges figure (OCF) of 1.08 per cent.
The Invesco Hong Kong & China fund, run by lead manager Mike Shiao and Lorraine Kuo, is a slightly different strategy, avoiding state-owned enterprises and seeking out companies with an economic moat.
Since Shiao joined the fund on 1 June 2012 it has returned 152.41 per cent, while the MSCI Zhong Hau index – a composite index of the MSCI China and MSCI Hong Kong indices – has risen by 114.27 per cent and the average peer is up 97.68 per cent. It has an OCF of 0.94 per cent.
Finally, the £1.1bn Fidelity China Special Situations investment trust has been overseen by Dale Nicholls since January 2014. Since Nicholls took over management of the growth-focused trust from veteran investor Anthony Bolton, it has made a total return of 102.25 per cent, while its average IT Country Specialists: Asia Pacific peer made 110.41 per cent and the MSCI China index went up 79.95 per cent.
Performance of trust vs sector & benchmark under manager
Source: FE Analytics
The trust is currently trading at a discount to net asset value (NAV) of 12.8 per cent, is 22 per cent geared and has ongoing charges of 1.11 per cent, according to data from the Association of Investment Companies.
An alternative way to invest for people less willing to make a big bet on a Chinese recovery is to invest in a broader emerging markets or Asian equity strategy.
“Both Chinese equities and emerging market shares generally, are inexpensive compared to their longer-term averages and their developed market rivals, with the MSCI Emerging Markets index trading on around 12x earnings,” said Bestinvest’s Hollands.
“In fact, emerging markets are the standout value opportunity at the moment and it is notable that over the last quarter they have significantly outperformed developed market shares again.”
Its preferred vehicles for this include two Asia-focused Schroders funds: closed-ended strategy Schroder Asian Total Return Investment Company and Schroder Asian Alpha Plus.
The five FE Crown-rated Schroder Asian Total Return Investment Company is headed up by King Fuei Lee and FE Alpha Manager Robin Parbrook. The £312.7m trust has a 25 per cent invested in Chinese equities and a further 29.1 per cent held in Hong Kong-listed entities.
Since taking over in March 2013, the pair made a total return of 88.38 per cent. This compares with 55.86 per cent from the average IT Asia Pacific – Excluding Japan trust and 48.7 per cent from the MSCI AC Asia Pacific ex Japan benchmark.
Performance of trust vs sector & benchmark under managers
Source: FE Analytics
The trust is trading at a premium to NAV of 2.6 per cent, is not geared and has ongoing charges of 0.97 per cent (2.68 per cent including performance fee).
Its sister strategy the £966.7m Schroder Asian Alpha Plus fund is also five FE Crown-rated and has been overseen by Matthew Dobbs since launch in November 2007. During his time on the fund it has made a total return of 199.13 per cent; the MSCI AC Asia ex Japan index is up 109.24 per cent while its average IA Asia Pacific Excluding Japan peer made 97.68 per cent return.
It holds 22.6 per cent of its portfolio in Chinese stocks and 24.4 per cent in Hong Kong names. It has an OCF of 0.94 per cent.
Two other open-ended strategies with significant exposure to Chinese and Hong Kong equities are tipped by Bestinvest: Fidelity Emerging Markets (16.9 per cent China, 9.4 per cent Hong Kong) and First State Asia Focus (13.4 per cent China, 14.1 per cent Hong Kong).
The £2.3bn Fidelity Emerging Markets fund has been overseen by FE Alpha Manager Nick Price since March 2010. Investing across a range of emerging markets, Price favours companies with strong market positions and competitive advantages: those are typically able to deliver attractive earnings throughout the economic cycle.
Since June 2010 the fund has made a total return of 79.92 per cent, against a gain of 60.81 per cent for the MSCI Emerging Markets index and a 50.43 per cent increase for the average IA Global Emerging Markets peer. It has an OCF of 0.96 per cent.
Finally, the five FE Crown-rated First State Asia Focus fund is also managed by Martin Lau along with co-manager Richard Jones. Unlike his previous fund, this £454.5m strategy has a broader Asian remit that extends to Australasia and targets large- and mid-cap companies with a stock market capitalisation of at least $1bn.
Since launching in August 2015, the fund has made a total return of 75.64 per cent, compared with a 74.84 per cent rise for the MSCI AC Pacific ex Japan index and a gain of 69.16 for the average IA Asia Pacific Excluding Japan peer. It has an OCF of 0.9 per cent.