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Chinese New Year

6 February 2018

Despite volatility investment company managers remain optimistic for the Year of the Dog.

Friday 16 February marks Chinese New Year where firecrackers, giving red envelopes of money to children and celebratory meals with loved ones will usher in the Year of the Dog around the globe. Dogs are said to be loyal, independent and communicative and those born in years of the dog include Elvis, Mother Teresa and Madonna to name just a few. To celebrate Chinese New Year, the Association of Investment Companies (AIC) has collated fund manager views on China and has published a table of investment companies with the highest exposure to the region (see below).

A key theme is one of optimism, despite the recent volatility, as investment company managers see the nature of China’s growth shifting to higher-quality, sustainable growth generated by ‘new’ China.

Outlook for China

Michael Kerley, manager of Henderson Far East Income Limited, said: “We are positive on the outlook for China in 2018 and beyond. The marathon address by Xi Jinping at the party congress in October laid the foundation for the economy, reform, environment and quality of life for its people not only for the next five years but out to 2050. At the heart of this address was a focus on sustainable growth with almost Trump like soundbites such as Beautiful China and Made in China while it was clear that the country will raise its profile on the international stage.

“Although GDP growth will remain robust this will now not be the main target of government policy with the quality and sustainability of growth more important than the quantum. From an investment point of view this direction should alleviate some of the risks while providing opportunity to invest in some very attractive companies which will be able to exploit the opportunities both at home and abroad.”

Ian Hargreaves, fund manager of Invesco Asia Trust, said: “China’s equity markets rallied in 2017 benefiting from increasing earnings expectations. This stemmed not only from sectors such as ecommerce, internet and consumer discretionary that are gaining share within economic activity, but also from industrial and commodity sectors that experienced greater pricing power as capacity continues to be reduced. This capacity discipline will be increasingly important in 2018 as the Chinese economy resumes its slow down.”

Howard Wang, portfolio manager of JPMorgan Chinese Investment Trust, said: “Headline growth rates should continue to slow both on a short-term cyclical basis, as the government continues to implement reforms to reduce excess capacity, and on a medium-term secular basis, given much-needed leverage stabilisation. However, despite these long overdue structural adjustments domestically, the resulting growth, albeit slower in the near term, should be more sustainable and higher in quality.

“The outlook for the year ahead is promising, as corporate earnings growth from ‘new’ China should deliver further equity gains. We also view recent government actions in China as positive, as they demonstrate political maturity and should aid policy continuity and policy execution.

“2018 marks the initial inclusion of A-shares into the MSCI indices. While the near-term impact on the A-share market could be limited, we see long-term positive implications for the development of the onshore markets. Upon MSCI index inclusion, A-shares will attract more foreign interest and flows, given increased relevance of the asset class, which will diversify investor profiles and investment style.”

Dale Nicholls, portfolio manager of Fidelity China Special Situations plc, said: “I remain positive on the investment opportunities that I see in the market in China. Challenges remain but it continues to be a dynamic economy and market, with huge variation in trends between the winners and losers – fertile ground for bottom up stock pickers such as myself. While the market has moved up, valuations on the whole remain compelling in a global context. One wonders if what has become a relatively stable and predictable policy environment compared to much of the West might also start to get reflected in valuations. The gap between China’s share of the global economy and its share of global stock markets remains significant, and I remain confident this will close over time. A-shares are moving into indices in a few months’ time and this could provide some support for a number of mainland listed companies.”

Finding opportunities

Ian Hargreaves, fund manager of Invesco Asia Trust, said: “We continue to find attractive opportunities among Chinese midcap companies.  Stocks such as Qingdao Ports, China Conch Venture and China Bluechemical have cashflow growth prospects that are being under-priced by the market in our view. We have also chosen CNOOC, a Chinese oil business, as a way of increasing exposure to the energy sector.  We are impressed by the company’s ability to reduce operating costs and capex in recent years and this is now enabling strong free cashflow generation at current oil prices.”

Ayaz Ebrahim, portfolio manager of JPMorgan Asian Investment Trust, said: “With valuations still at reasonable levels after the rally last year, we believe structural growth businesses should drive further re-rating this year and beyond. We remain focused on well-managed businesses in the consumer, healthcare and technology sectors, while continuing to underweight the low quality Old China business which trade at expensive valuations with little growth prospects.”

Dale Nicholls, portfolio manager of Fidelity China Special Situations plc, said: “Rising internet penetration is also supporting the structural shifts in consumption, with e-commerce continuing to take share from traditional retailing. The fact that ecommerce penetration in China has already surpassed many western markets, including the US, exemplifies the speed of structural change in many parts of the Chinese economy. We are seeing new business models emerge exemplified by growth in online businesses such as flash sales, live video streaming, and a range of education services.”

Michael Kerley, manager of Henderson Far East Income Limited, said: “The opportunities come in many forms. State owned enterprise reform will allow private companies to invest or compete in areas which have previously been dominated by the state while identifying the state companies which will be at the forefront of China’s push for national champions could also prove profitable. Key themes such as One Belt One Road, environmental sustainability and financial reform will provide opportunity while the increase in wages and disposable income will support consumer related sectors and companies. The opening up of the A share market and inclusion in major indices provides a whole new universe which remain largely undiscovered by western investors.

“With China moving up the innovation curve local branded companies are already starting to take market share away from the multinationals and identifying these winners both in the home market and overseas will be beneficial. With an income focused process we see the best opportunities currently in banks, technology, energy and consumer related sectors. All these provide attractive valuations, strong cashflow generation and attractive and growing dividends.”

Xi Jinping, Trump and Kim Jong-un

Michael Kerley, manager of Henderson Far East Income Limited, said: “Although Xi mentioned democracy in his speech in October it’s pretty clear this will be with Chinese characteristics and the position of the party will remain at the forefront of Chinese life. Social unrest is much more likely to manifest itself through unemployment, quality of life or slower growth than through political unrest especially while Xi remains the most popular leader since Deng. International politics by contrast is much more volatile and there is a risk that while China remains surrounded by unpredictable leaders in the US and North Korea that relations break down and disputes escalate. So far the signs are good as China’s response to provocation has been measured and restrained while Xi and China’s standing on the world stage continues to grow which is in line with his objective of ‘Making China Great Again’ – to use another ‘Trumpism’.”

Investment companies with highest exposure to China, Hong Kong and Taiwan

Company

AIC sector

% China

% Hong Kong

% Taiwan

% Total

JPMorgan Chinese

Country Specialists: Asia Pacific

95.10

3.20

1.50

99.80

Macau Property Opportunities

Property Direct - Asia Pacific

85.57

-

-

85.57

Fidelity China Special Situations

Country Specialists: Asia Pacific

27.54

48.95

2.16

78.65

JPMorgan Asian

Asia Pacific - Excluding Japan

33.40

12.80

10.70

56.90

Invesco Asia

Asia Pacific - Excluding Japan

24.67

14.92

11.78

51.37

Pacific Horizon

Asia Pacific - Excluding Japan

37.00

2.00

11.00

50.00

Martin Currie Asia Unconstrained

Asia Pacific - Excluding Japan

-

41.49

4.80

46.29

Henderson Far East Income

Asia Pacific - Excluding Japan

26.70

4.82

12.21

43.73

Schroder AsiaPacific

Asia Pacific - Excluding Japan

14.78

20.26

8.68

43.72

Edinburgh Dragon

Asia Pacific - Excluding Japan

13.51

20.32

4.94

38.77

Schroder Oriental Income

Asia Pacific - Excluding Japan

10.62

14.11

12.24

36.97

Aberdeen Emerging Markets

Global Emerging Markets

22.00

4.00

10.00

36.00

JPMorgan Emerging Markets

Global Emerging Markets

26.70

-

8.60

35.30

Fidelity Asian Values

Asia Pacific - Excluding Japan

15.87

4.79

14.56

35.22

JPMorgan Global Emerging Markets Income

Global Emerging Markets

12.00

7.60

15.40

35.00

Aberdeen New Dawn

Asia Pacific - Excluding Japan

12.57

17.73

4.64

34.94

Witan Pacific

Asia Pacific - Including Japan

18.54

9.68

4.53

32.75

Templeton Emerging Markets

Global Emerging Markets

21.80

-

9.40

31.20

Scottish Oriental Smaller Companies

Asia Pacific - Excluding Japan

10.00

5.49

11.82

27.31

Pacific Assets

Asia Pacific - Excluding Japan

0.51

6.49

17.88

24.88

Establishment Investment Trust

Flexible Investment

-

16.00

8.00

24.00

Scottish Mortgage

Global

23.00

-

-

23.00

Aberdeen Asian Income

Asia Pacific - Excluding Japan

4.29

10.97

6.23

21.49

Source: Morningstar. Data as at 31 December 2017 except for Macau Property Opportunities which is as at 30 June 2017.

-Ends-

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Notes

  1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 347 members and the industry has total assets of approximately £174 billion.
  2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.

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