China: time to venture back?
● Boarding the boat
For emerging market investors, India has been in the ascendancy this year, said Dave Baxter in Investors’ Chronicle. But the “problem child” of Asia has recently offered “some reason for optimism”. Following a “torrid run”, the MSCI China index has recovered in the year to date – at the start of June it was up by more than 8%. Some investors, such as Peter Dalgliesh of Parmenion, reckon there are “signs of tangible change coming through to help stabilise financial and property markets”. Given “depressed expectations and low valuations”, there’s “potential for upside surprise”. As Valerio Baselli noted on Morningstar in April, “the Chinese stock market has underperformed global financial markets for more than three years now”, so equities are “trading at valuations not seen for nearly a decade”.
● Safety first
There are plenty of reasons for caution, said Reuters. Although the economy grew by a “faster-than-expected” 5.3% in the first quarter, and industrial output is rising, “China’s property market slump, high local government debt and deflationary pressure remain a heavy drag”. Lack of progress in the property market, which provided around 25% of economic output before the downturn, remains a particular worry. The central bank last month announced a re-lending programme in the hope of accelerating sales of “unsold housing stock”, but it’s unclear if that will do the job. China’s brighter spots are retail spending and exports. “But economists have warned that rising trade tensions with the West … may impose more challenges to Chinese solar and electric vehicle producers.”
● Fund options
Investors betting on China should treat it “as a high-risk satellite position in a portfolio rather than something more central”, said Dave Baxter. But there are options “for the adventurous”. Killik & Co’s Mick Gilligan suggests Fidelity China Special Situations as “a punchy bet”: around 40% of the trust’s portfolio is tied up in consumer discretionary stocks. Peter Dalgliesh rates Allianz China A-Shares Equity. Rob Morgan at Charles Stanley, meanwhile, makes the case for FSSA Greater China Growth, run by “veteran” Martin Lau, which backs high-quality companies in China, Hong Kong and Taiwan.