First State Greater China Growth - a view on trade wars
Kate Marshall | Fri 24 August 2018
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- China’s stock market has been volatile in recent months
- This fund tends to hold up better during weaker periods for the market
- Domestic consumption could drive long-term growth in the region
Our View
China is the world’s second largest economy. It’s forecast to overtake the US within the next decade. Its consumers are earning and spending more, which could help drive its growth.
Investing in a single emerging country carries risks though and the road to full economic development won’t be smooth. This means China’s stock market will be volatile at times, as we’ve seen so far this year.
We think Martin Lau, lead manager of First State Greater China Growth, uses a sensible approach to investing in what is a volatile market. He looks for companies that sell products with a strong brand, which means customers are less likely to switch to a competitor even if prices rise. He also likes those run by a management team that have a great track record of running a business.
We like these qualities. It means the fund has tended to be less volatile than the broader Chinese stock market and Martin Lau has built a great long-term track record. The fund will fall as well as rise in value though so investors could get back less than they invest, and remember past performance isn’t a guide to future returns.
Manager outlook – on trade wars and tariffs
One of the main issues weighing on China, and the global economy, is a potential trade war with the US. It’s made investors nervous and means the Chinese stock market has been volatile in recent months.
Martin Lau says China exports more to the US than it imports, so it’s at risk of more harm if President Trump introduces further tariffs. But China’s economy is much less dependent on exports than it used to be. Domestic consumption is now the largest contributor to the country’s economic growth. And the US’s current tariffs only affect 2.2% of China’s total exports.
In reality the full impact of these tariffs is unclear, especially as we haven’t heard the last of them just yet. If the amount of global trade reduces, it could dampen investor and business confidence across the globe. Over the longer term we think domestic consumption will be the main driver of growth, helped by rising wealth.
How has the fund performed?
The fund has performed well over a volatile year for the Chinese stock market .
Commodity prices have risen over this time, which increased the cost of the raw materials needed for some companies to make their products.
But a number of companies in the fund were able to pass on these costs to customers through higher prices, without affecting demand. Home appliance companies Gree Electric and Qingdao Haier were both able to do this. Tsingtao Brewery also managed to increase its prices for the first time in a decade.
The fund has also delivered strong returns over the long term. Over the past ten years it’s grown 243.6%* compared with 185.8% for the average fund in the IA China/Greater China sector. But please remember past performance isn’t a guide to future returns.
First State Greater China Growth - 10 year performance
Past performance is not a guide to the future. Source: Lipper IM *to 31/07/2018.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
| July 2013 -
July 2014 |
July 2014 -
July 2015 |
July 2015 -
July 2016 |
July 2016 -
July 2017 |
July 2017 -
July 2018 | |
| First State Greater China Growth | 6.1% | 5.1% | 12.7% | 26.0% | 14.0% |
| IA China/Greater China | 6.6% | 10.5% | 10.3% | 33.7% | 9.3% |
Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2018
At the start of this year Martin Lau took some profits from investments in companies that performed strongly. This includes Foshan Haitian Flavouring, which makes sauces and seasonings, and pharmaceutical company Jiangso Hengui Medicine.
New investments in the fund include shares in China Mengniu Dairy, one of China’s largest dairy companies. After a difficult 2016, the company changed its CEO and has transformed itself into a provider of healthy products. These improvements helped the business grow throughout 2017 and Martin Lau thinks profits could improve further from here .
Please read the Key Features/ Key Investor Information in addition to the information above.