Should you hold Chinese stocks in your portfolio?
If you’re feeling a bit flat now the excitement of Christmas is behind you, never fear, more celebrations are just around the corner. The Chinese New Year takes place this year on the last Saturday in January and, although I never need an excuse to get the family together for some dim sum, the occasion does provide a more entertaining reason than usual to talk about China from an investing perspective.
Just like the traditional Chinese banquet, the landscape of Chinese investments is rather varied. There are some fantastic-looking opportunities among consumer companies and technology firms, some options that look alright from a distance but become less appealing upon closer inspection—the property market comes to mind—and some options that look downright unappetising, such as the state-owned banks.
So China has its share of challenges. It desperately needs to implement reforms if it wants to continue growing at its current pace, yet that is just what its government can’t quite seem to do. One of the main concerns economists have is the size of the country’s debt. In addition to exports, China’s past decade of astronomical economic growth has been fuelled by infrastructure and construction, which have been funded with borrowed money. This phase is reaching its natural end, yet the government is pushing its banks to keep lending, putting them in the position of taking on more and more bad debt.
China’s currency is also a concern. It is considered too highly valued against a basket of global currencies and many investors are nervous it might face harsh falls down the line. This time last year, China’s government (which effectively controls the value of the currency) let the yuan start to slide, which prompted sell-offs across the Chinese stock market. It responded to these by suspending trade and limiting the amounts people could sell.
This kind of interference does nothing to improve foreign investors’ confidence in China. That said, after a very rocky start, the Chinese stock market managed to bounce back and actually delivered quite handsome returns for sterling investors last year. I think the lesson is – China is a pretty hard market to call. I know more than a few ‘China bears’, who worry the country can’t reform fast enough, yet I also meet many managers who remain extremely positive on China’s long-term outlook as a key global growth driver. After all, its population is more than four times that of the United States at roughly 1.4 billion people. That’s some serious spending power and this potential, for the most part, isn’t reflected in the average investor’s global portfolio holdings.
When it comes to Chinese dining, I always like to have a couple of suggestions from a trusted source, and I suggest that’s not a bad approach for China funds too. A long-held favourite of mine is First State Greater China Growth. Its been around since 2003 and has been so popular that it was closed to new investments for four years, only re-opening in February 2016. Manager Martin Lau has a proven ability to outperform in a variety of market conditions and its ‘greater China’ stance makes it attractive at the moment – around 25% of the fund is currently invested in Taiwan1, for example, which makes it a bit more defensive.
Another excellent option is the Invesco Perpetual Hong Kong & China fund. It has fewer holdings and less geographic diversity than the First State fund, making it a more concentrated play on Chinese equities. Yet it is firmly tilted towards China’s new economy as opposed to its old, and with more than 50% of the fund invested in consumer stocks, it is well positioned to benefit from the country’s rising middle class.
Darius McDermott is managing director of Chelsea Financial Services