This Saturday marks the beginning of the Chinese New Year of the Rat, the first in the 12 signs of the zodiac. The story goes that the Jade Emperor said the order of the zodiac would be based on the order in which each animal arrived to his party.
The Rat tricked the Ox into giving him a ride and as they arrived at the finish line, it jumped down and landed ahead of Ox, coming first.
According to Chinese culture, the rat is a sign of wealth and surplus and those born under it are generally believed to be industrious, thrifty, diligent and positive.
Millions of people over the world will celebrate the Chinese New Year on Saturday 25 January
China has faced struggles of late: ongoing trade wars with the US and, more recently, the dramatic outbreak of the Coronavirus.
It has taken a toll. Chinese mainland stocks are trading below historical averages meaning equities might appear attractive from a valuation point of view.
Over 2019, the MSCI China Index delivered an 18.9 per cent total return in sterling terms, ahead of the 14.3 per cent return from the MSCI Emerging Markets Index in which Chinese equities are the biggest constituent at 34 per cent.
So what should you do? Invest or steer clear?
As millions of people celebrate the Chinese New Year today, This is Money speaks to industry experts about their thoughts on the country’s economy, where they see value and even some of their top Chinese fund picks.
Barclays’ Will Hobbs suggests keeping an eye out for business confidence surveys
Will Hobbs, chief investment officer at Barclays Investment Solutions
China’s economy has been slowing over several years, even predating the current US administration.
We expect this slowdown to abate a little this year, perhaps contributing to a more helpful backdrop for the country’s stocks to do well.
We are among those who have responded to this stabilisation in the wider region by adding a little exposure to emerging market equities to our multi-asset class portfolios.
A lot of investor interest within the Chinese markets tends towards companies that benefit from the so called ‘New China’ economy.
This theme takes in the continuing emergence of a Chinese consumer story, meaning a focus on media, retail and pharmaceutical businesses.
In terms of the US-China trade wars, tensions have certainly dissipated in the past few months, however we suspect the main agitations between the two sides of the debate will remain for some time to come. Investors should be prepared for sporadic flare-ups at the very least.
Surveys of business confidence and early warning signals on trade remain key to watch for the wider Emerging Asia space.
Fund picks: We like the Fidelity Asia fund, managed by Teera Chanpongsang. It has about 40 per cent invested in China and the manager has a long and successful performance track record.
Caroline Yu Maurer says government support on the macro economy may drive a mean reversion trade for ‘old economy’ sectors
Caroline Yu Maurer, head of greater China equities at BNP Paribas Asset Management
China’s economic growth slowed materially in 2019 on weakening global demand and ongoing trade tensions uncertainties, but Chinese equities markets outperformed significantly over the year.
The tech sector had a good performing year mainly driven by strong expectation on 5G handset rollout as well as recovery of data centre demand.
Despite the re-rating in 2019, Chinese equity markets’ valuations remain attractive relative to developed equity markets.
Given its structural changes towards more consumption, innovation and sustainability, we believe long-term earnings growth opportunities can be found mostly in sectors like IT, healthcare, consumer space.
Having said that, old economy sectors such as financials, energy and materials have suffered de-rating due to economic slowdown. Any further government support on the macro economy may drive a mean reversion trade for those sectors.
China and the US signed a temporary trade agreement this month, as expected though the Trump administration made an unexpected comment that the tariff cuts would not take effect before the US election in November.
This comment has dampened the positive sentiment and underscored the market’s concern that the so-called ‘Phase One’ deal might have over-promised and is now under-delivering. Any substantive progress in bridging the gap on key, long-standing issues remains to be seen.
Darius McDermott says demographics are not great in China – a consequence of many years of the one child policy
Darius McDermott, managing director of Chelsea Financial Services
China has an economic growth rate that – although it is slowing – is still the envy of the rest of the world.
The stock market isn’t particularly cheap, but more companies are being made accessible to foreign investors: more Chinese A Shares have been added to the MSCI Emerging Market indices (so passive funds are forced buyers) and I believe China’s weighting in indexes can only continue to grow.
There is also political will to encourage companies to have better corporate governance and to return money to shareholders in the form of dividends. This is good for investors.
We like the Chinese consumer story and we also like technology where it is linked to the consumer. As a long-term story, the Chinese consumer should be an attractive one for investors.
It’s not all plain sailing though. There are obviously issues around things like Huawei, ongoing trade wars and the demographics are not great with an ageing population that is feeling the consequences of many years of a one child policy.
Debt is also very high – for the government, companies and now individuals. The banking sector is one that many professional investors avoid as a consequence.
Fund picks: There are some excellent active managers in this space. My favourite funds include the Invesco China Equity and First State Greater China Growth funds and Fidelity China Special Situations investment trust.
Jason Hollands recommends the Schroders Asian Total Return trust and Fidelity Emerging Markets fund for good exposure to China
Jason Hollands, managing director at Bestinvest
The last year – the Year of the Dog – saw investor sentiment towards this vast country overshadowed by the US-China trade war.
Despite this, investment returns were very strong, as they were across most markets.
Of course you should only invest on a longer-term horizon and when it comes to China, as with emerging markets generally, do so with your eyes wide open about the risks.
Governance standards are not the same in China as those in developed markets and despite the veneer of embracing the trappings of market capitalism, the Chinese authorities wield considerable influence over the markets and have the ability to intervene aggressively.
In fact the Chinese markets are packed with state-owned enterprises whose boards include representatives of the Communist Party. Shareholder interests can readily be eclipsed by companies being dragooned into actions that are deemed to be in the interests of the state.
On the positive side, the long-term case for being exposed to China is structural in nature and driven by the sheer, vast numbers. Over time, if China does continue to become more integrated into the global financial system, then clearly the potential growth from Chinese equities could be truly significant.
Fund picks: Funds and trusts worth considering include the Schroder Asian Total Return investment company, which has a defensive strategy, and currently has 23.9 per cent exposure to China, and Fidelity Emerging Markets which currently has 27 per cent invested in China.
Alex Farlow says positive figures in 2019 should provide healthy economic performance for Chinese markets this year
Alex Farlow, head of risk based solutions at Square Mile
The recently agreed trade deal between China and the US, and positive macroeconomic figures for 2019 should provide a good platform for healthy economic performance and therefore for Chinese markets to move higher in 2020.
But one should not think that this is the end of friction between China and its Western economic super power rival. It is likely to only be the beginning.
Other factors, however, appear to paint a decent outlook for China over the coming year.
Whilst the headline numbers show that Chinese GDP growth has slowed over the last decade from 9.4 per cent to 6.1 per cent, what it fails to highlight is that, given the strong increase in GDP over this period, the incremental expansion in growth over 2019 is bigger than it was at the faster growth rate 10 years ago – 145 per cent bigger in fact.
This means there are greater opportunities for Chinese companies than there were 10 years ago. The fact that the Chinese government has only undertaken modest levels of monetary easing over 2019 would imply two things.
Firstly, the government is happy with the current level of growth and secondly that they have more room to manoeuvre with interest rates currently at 4.15 per cent.
Fund picks: We see the First State Greater China Growth fund, which places an overriding emphasis on selecting higher quality companies, as a very strong option for long-term investors who wish to access the greater China region, but in a more conservative manner.
Meanwhile, the Matthews Asia China Smaller Companies fund seeks to take advantage of China’s growing shift towards a more consumer-driven economy by targeting the most innovative and entrepreneurial companies, typically located in emerging industries such as automation, healthcare, and e-commerce.
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