The rat could live up to its name as China’s economy powers on
CHINA’S NEW year has just begun, categorised as the ‘year of the rat’, the first in the 12-year cycle of Chinese zodiac signs.
It symbolises wealth, talent, self-awareness but also jealousy and thrift. With the first phase of the US-China trade deal completed, the rat could live up to its name.
China’s economy is now the second largest in the world with a nominal GDP of over US$10 trillion. This makes it larger than the combined economies of the third and fourth – Japan and Germany.
Trade wars have dominated recent news over China but the recent agreement eases the US threat to apply a 15 per cent tariff of $160bn on Chinese goods, largely in the field of consumer electronics.
America plans to also halve the tariff rate on $120bn of other Chinese imports
In return, China has cancelled planned retaliatory rates and promised to buy more US goods and services over the next two years.
Whilst this may signal a reasonable year ahead, Martin Payne at wealth manager Brewin Dolphin in Leeds still regards China “as a higher risk market in which to invest” but singles out First State China Growth as an attractive option for those who prefer direct entry over a panAsian fund.
Spread across up to 50 stocks, it has at least 70 per cent assets in or closely associated with mainland China. It has returned 56.3 and 83.3 per cent over three and five years respectively.
China’s economy expanded by 6.1 per cent in 2019, which was almost the slowest in three decades. Yet this was still the envy of the rest of the world and better than such Western rivals as Germany at 0.6 per cent and US of 2.5 per cent.
The disappointments were manufacturing investment, which fell 3.1 per cent, and property which showed a twoyear low of 9.9 per cent.
To stimulate the market, China has reduced taxes, relaxed bank lending and permitted local authorities to sell bonds to fund infrastructure. However, President Xi will not wish to boost too far for fear of repeating the 2008 crisis which raised growth but created enormous debt.
“The latest economic data suggests growth may be bottoming. Should current trends persist, we may see some growth reacceleration in the first half of 2020,” says Nick Keenan, director of Wealth Manager at Barclays. He warns that the
Chinese stock market “can be volatile in the near term”.
Darius McDermott, of Chelsea Financial Services, says that China’s growing middle class is a good indicator. After purchasing such white goods as cars and washing machines, consumers are upgrading to more expensive models. In this context, James Rowbury, from Redmayne Bentley, likes the aptly named Fidelity China Consumer Fund, which has grown by 90.2 per cent in five years.
More companies are being made accessible to foreign savers. Rowbury notes that in December China made a significant change in its requirement for new share issues with firms needing to demonstrate they were capable of “continuous profitability” to “continuous operation.” Technology is likely to be the winner.
For a good blend, Rowbury suggests also buying Fidelity China Focus where the managers seek undervalued stocks.
There is also the political will to encourage better corporate governance and to return money to shareholders as dividends. Kelly Kirby, chartered financial planner at Chase de Vere in Leeds, is concerned over the banking system with ownership largely controlled by the state and high levels of bad debts.
Yet the demographics are worrying with many years of a one-child policy resulting now in an ageing population. With 1.42 billion population, it is the most populated country in the
POWERHOUSE:
world. It is moving from a rural economy to urban with 60 per cent living in the country in 2004 and only 40 per cent today.
Formerly, China concentrated on investing in energy, materials and industrials whilst now its emphasis is on IT, healthcare and consumer goods and services. “Innovation in new economy stocks means that Chinese companies are challenging global leaders,” says Kirby.
In the words of renowned investor Warren Buffet, “The 19th century belonged to England, the 20th century to the US and the 21st to China.”
For a direct share as opposed to a fund, consider Hong Kong listed AIA , says Adam Martell, chartered wealth manager at Charles Stanley. AIA is the world’s largest life insurance company assuring over $1.5 trillion and aims to be the Amazon of China’s healthcare service.
McDermott says investors should not ignore the region and “luckily there are some excellent active fund managers”. He tips China Equity, First State Greater China Growth and Fidelity China Special Situations Investment Trust.
Just two investment trusts have over half their assets in China (including Hong Kong), showing their growth over five years:
■ JP Morgan Chinese with 99.5 per cent, up 111.7 per cent
■ Fidelity China Special Situations with 71.1 per cent, up 83.4 per cent.
Avoid state-owned enterprises, many of which are fundamentally poor businesses, warns Jason Hollands from Tilney. Whilst he prefers a wider collective (such as Schroder
Asian Total Return, Fidelity Emerging Markets or JP Morgan Emerging Markets), he says those specifically seeking China should buy JP Morgan Chinese which trades at a distinct discount.
“2020 has the potential to be a very positive year for Asia and emerging markets as capital flows back into the region and stocks – which have been trading at values below longer term trends – get re-rated,” says Jason Hollands of Tilney, who warns about volatility and the veneer of embracing governance standards.
For an Asian view with a distinct Chinese dimension, Payne likes the growth-orientated Fidelity Asia. With a bias towards larger cap companies like Alibaba, Samsung, Taiwan Semiconductor and Tencent, the fund holds around 50 per cent in China, Hong Kong and Taiwan. It has increased by 47.4 and 93.1 per cent over three and five years.
Keenan similarly believes investors would be better served by holding Chinese stocks in a broadly diversified portfolio for the long term.
Increased liquidity and access to credit are two factors that signal reasons to be optimistic in China this year, says Mike Kerley, manager of Henderson Far East Income, which holds 26.6 per cent in the country.
Martell also prefers a broader Asian Pacific collective, like Guinness Asian Equity Income which has almost 40 per cent in China and 20 per cent in Taiwan. If pressed for more focus, he likes First State Greater China which notably includes the domestic A share market.
Martell likes fund managers to have experience and location in China and not be based thousands of miles away. A local team-based approach makes sense for company analysis.
He likes First State Stewart Asia but warns about the high holding of 14 per cent in Taiwan Semiconductor.
A wider Asian approach is recommended by Kirby, notably JP Morgan Emerging Markets, Fidelity Emerging Markets and ASI Emerging Markets Income Equity. Their Chinese holdings amount to 38, 27 and 22 per cent respectively.