Since ending its three-year lockdown at the beginning of the year, China’s stock market has been on a wild ride. With a struggling property sector and a disheartened consumer, it's not surprising that sentiment towards the world's second-largest economy has been bleak.
Looking back over the past five years, the FTSE China Index has fallen 10.31%*, which is well behind the broader Asian and emerging market indices.
4 reasons for slower Chinese growth and what’s next?
For fund managers investing in these markets, the decision to be underweight or overweight on China compared to a relevant index has significantly impacted relative performance. And the increased ups and downs have understandably put off many investors.
Five-year performance
Past performance isn’t a guide to the future. *Source: Lipper, to 31/10/2023
Despite these headwinds, is it too soon to write off China? Yes.
A lot of the pessimism is likely already factored into share prices. While there might be more challenges ahead, China's role in global economic growth won't just disappear.
Looking ahead over the next five to 10 years, this could present an attractive entry point for investing in China.
Active funds are a good way to invest. They’re run by a professional fund manager who will try to beat an index, instead of simply tracking it. While there’s potential for the fund to perform better than the index over the long run, the reverse can also be true.
If you’re looking to invest in China and are happy with the higher risk, we think a broad global emerging markets or Asian fund is a good starting point.
Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term (five years plus) diversified portfolio.
For more information on these funds including their risks and charges, please look at the key investor information and online factsheets linked below.
FSSA Greater China Growth
Lead manager of FSSA Greater China Growth, Martin Lau is a highly regarded investor in Asia, with over two decades of experience investing across the region.
Lau and his team look for high-quality companies they can invest in for the long term. They favour companies with a competitive advantage that others struggle to replicate, like a well-known brand or the ability to raise prices for their products without affecting demand from customers.
Companies should also possess the potential to grow earnings sustainably over the long term and be run by reputable management teams that avoid taking unnecessary risks in the pursuit of short-term gains.
To make sure the fund is well diversified, Lau invests across a range of sectors. He focuses on areas that have the potential to hold up well in different market conditions or those that could benefit from rising consumer spending. This includes technology, industrial and consumer sectors. The fund mainly invests in larger companies, it can also invest in some higher risk smaller companies.
Sector breakdown
Source: FSSA, as at end of September 2023.
Martin Lau’s thoughts on the Chinese market:
“Investing in China’s dynamic market comes with an evolving set of challenges and opportunities. But we also see an attractive opportunity set in a unique market.
The demographic tailwinds may be less robust than before, but we still see room for industry leaders to deliver attractive returns in a more mature economy with a growing middle class.
Overall, we have been impressed by the improving quality of Chinese companies and management over the years. And we stand by our belief that the best time to buy is when things appear gloomy and valuations are undemanding.”
More about FSSA Greater China Growth, including charges
FSSA Greater China Growth Key Investor Information
Schroder Asian Alpha Plus
Richard Sennitt, the lead manager of Schroder Asian Alpha Plus, has been investing in Asia since 2001 and has a wealth of experience investing in the region. The fund is co-managed by Abbas Barkhordar who’s spent much of his career focused on Asia and emerging markets.
The managers think the best way to navigate the volatility that comes with investing in the region is by investing in high-quality businesses – but without paying too much for them.
They look for companies they think can sustain returns over the long run. They should have good cash flows, strong franchises, a quality management team, superior corporate governance standards and a strong business model that's able to defend against competition.
Currently, they invest a lot less than their benchmark in China. That said, they still have plenty of exposure to the region through companies selling into China – this provides indirect exposure to its economy.
Please note the managers can use derivatives which, if used, adds risk. They mainly invest in larger firms, but they also have the ability to invest in higher-risk smaller companies.
Richard Sennitt and Abbas Barkhordar’s view on their investments in China:
“We are underweight China although this is partially offset by an overweight to Hong Kong. Whilst there are a litany of potential concerns surrounding China at the moment, including worries over geopolitics, domestic regulation and economic strength these are generally well known.
Furthermore, concern around excess capacity in some industries that previously had been considered high return has hit share prices. Still, the recent disappointment and sell off has started to cause opportunities to appear in areas that previously carried significant valuation premiums.
We remain underweight but at the margin have started to add to select names there, but it shouldn’t be forgotten that by investing more broadly in Asia many names could potentially benefit should the Chinese economy start to stabilise. These include IT companies in Taiwan and Korea that supply product into goods sold domestically in China and commodity plays in Australia.”
More about Schroder Asian Alpha Plus, including charges
Schroder Asian Alpha Plus, Key Investor Information
iShares Emerging Markets Equity Index
iShares Emerging Markets Equity Index offers a low-cost option for tracking the performance of the FTSE Emerging Index which covers most of the emerging stock market.
It does this by investing in most, but not all the index. This process is known as partial replication. This should help the fund track the index closely without the cost of holding every stock.
China accounts for around a third of the index (see chart below) which means you can gain a meaningful exposure to its stock market performance. It also plays a big role in driving demand for goods and services in other emerging economies. It’s a good way to get exposure to China’s broader influence on the region.
Country breakdown
Source: Blackrock, as at end of September 2023.
A proportion of this fund is also invested into smaller companies which are higher risk than their larger counterparts. The fund can also lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs lower but adds risk.
More about iShares Emerging Markets Equity Index, including charges
iShares Emerging Markets Equity Index, Key Investor Information
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