Too big to ignore?

Bolton knows a little bit about the country. Three years after stepping down from the helm of his market-leading fund, he came out of retirement to launch Fidelity China Special Situations, running it until 2014 before hanging up his boots for good.

“Now is an exciting time to be invested in China, because it’s one of the few markets in the world that is not near its all-time high,” he tells his former colleagues. “And I particularly compare China to America, which is at its peak – shares have done amazingly well, obviously anything related to AI – and I just don’t feel that that has rubbed off on China.”

Comparisons between stock market-listed companies in the world’s two biggest economies are certainly eye-catching. BYD, the Chinese electric vehicle manufacturer, sells as many cars as Tesla yet the US’s company’s market capitalisation is seven times bigger. Alibaba, China’s ecommerce behemoth, is worth just a tenth of Amazon. “I think that gap will close,” adds Bolton.

In the UK, however, relatively few investors have any exposure to these businesses or the broader Chinese market. There are some understandable reasons for that, including the reality that most of us are far more familiar with America’s household-name businesses than Chinese companies. China’s stock market is also very immature compared to its US equivalent; Chinese shares don’t even feature in the MSCI World Index, a benchmark of global stock markets, because MSCI doesn’t deem them to be sufficiently accessible.

It’s also worth pointing out that Chinese equities have had a torrid time in recent years. Factors including the Covid-19 crisis, geopolitical tensions and the tariff dispute with the US have seen the Chinese market lag both the global index and other emerging markets over the past five years. Domestic problems – notably a crisis in the country’s property sector – haven’t helped either.

Nevertheless, given the size and breadth of the Chinese economy, it is difficult to ignore the country. Stock market investors in most countries have a natural tendency to hold more of their money in companies close to home, but well diversified portfolios have global exposure in order to manage risk and capture opportunity. And there’s certainly plenty of the latter; despite its issues, most economists expect China to continue growing rapidly – and to overtake the US as the world’s largest economy within the next 10 to 15 years.

Now might be the moment to take advantage. The past year has seen a recovery from Chinese equities, with the market starting to recover its previous losses. But as Bolton points out, this positive momentum still leaves Chinese equities undervalued. The Chinese market remans a way off its highs, unlike many Western exchanges, which have been testing these over the past few weeks; the MSCI China Index remains a third down on its peak.

The good news is there are a growing number of collective investment funds available to UK investors looking to China. This is important: in a collective fund, you get access to a diversified portfolio of stocks chosen by a fund manager with specialist experience and expertise. That’s especially valuable in China, where navigating the nuances of the economy, the market, and individual companies can be challenging.

Both investment trusts and open-ended China-focused funds are available. But there’s a strong case for considering the former. China’s market can be illiquid so the closed-ended structure of an investment trust is a good fit; managers can take long-term positions in Chinese stocks without having to worry about the ebbs and flows of investor demand for the fund.

The AIC’s China sector includes three options: Baillie Gifford China Growth, JPMorgan China Growth & Income and Fidelity China Special Situations, the fund that Bolton launched 15 years ago. But you could also look at the ten or so investment trusts in the Global Emerging Markets sector many of which will have substantial holdings in China, alongside exposure to other developing economies.

China won’t be for everyone; it is a more volatile market, as the past five years have shown, which may discourage the risk-averse. However, for investors who want global exposure to stock markets, to overlook China is a bold statement in itself. Anthony Bolton, for one, thinks it would be a mistake.