According to FE Analytics, the MSCI China has returned 298.17 per cent over the past 10 years while the best performing developed market index – the S&P 500 – has gained just half of this.
The more domestically-focused Shanghai Composite index, which doesn’t include companies listed in Hong Kong, has returned 244.91 per cent over the period.
However, the past few years have seen a more bearish tone from investors and commentators with the hint, and eventual withdrawal, of the Fed’s QE programme causing a number of sell-offs in recent years.
The market has also fretted about a ‘hard landing’ as its growth slows and it transitions away from exports into a consumption-led economy. Worries over China’s ‘shadow banking’ system and a purported housing bubble have also contributed to weakness; FE data shows that the Shanghai index lost money in 2010, 2011, 2012 and 2013.
However, 2014 has been a year of change – particularly for domestically focused companies. The market has lapped up the government’s surprise rate-cut recently, with the Shanghai Composite index grinding higher and higher. It is up almost 40 per cent in 2014, and 10 per cent in the past week alone.
The below graph doesn’t include yesterday’s gains of more than 4 per cent.
Performance of indices since 22 Nov 2014
Source: FE Analytics
The rise in the MSCI China index has been more moderate thanks to its high weighting to Hong Kong, which has encountered a number of political protests in recent months. Still, it has still made double digit returns this year.
Alastair McCaig, market analyst at IG, says better expectations of more direct stimulus from China have helped drive equity markets this week. Craig Botham, Schroders’ emerging markets economist, says this marks a change of stance by the People’s Bank of China which until now had focused on selective easing measures and liquidity injections. Botham expects further easing, with progress “slow and steady”.
It’s not only looser policy that is boosting the outlook for China, says director of Asian equities at Barings William Fong. He says the recent surge in Chinese stocks can also be attributed to improving economic numbers and ongoing reforms at government level.
“Key data points in China suggest that the best investment opportunities are ahead of us, particularly in light of the highly significant reforms being rolled out by the Chinese government to open up the mainland economy – and corporations – to a global investor base,” he said.
“There are lots of great companies producing high quality goods and we firmly believe that China remains very undervalued compared to other key global markets."
He adds that inflation is finally under control – supported by low global energy prices – affording the Chinese authorities greater flexibility in the tools they can use to stimulate the economy.
For those who are equally bullish on China, we look at different ways investors can gain access:
Open-ended funds
There are 32 funds in the IMA China/Greater China sector. Only half have beaten the MSCI China index over the medium term of three years, and only 17 per cent have done so over the longer term of 10 years. Of those with a three year track record, several stand out over the longer term.
FE Alpha Manager Martin Lau and Sophia Li co-manage the £591m First State Greater China Growth fund, which is top quartile over three, five and 10 years while the $1.6bn JPM Greater China fund, co-managed by Howard Wang and Emerson Yip, is also top quartile over three and five years.
The funds both have overweights in telecoms and financials with each having a combined 50 per cent in the two sectors.
Fidelity China Consumer, managed by Raymond Ma since September 2011, is top quartile over three years. As the name suggests it concentrates on the rise of consumption in the Chinese economy with about a third of the fund in consumer products and another third in financials.
The three funds have all beaten the sector average and MSCI China over three years with FE Alpha Manager Ma’s fund the best performing. Unfortunately it is closed to new money, but investors can still get access to the offshore domiciled version of the fund.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
First State Greater China Growth, JPM Greater China fund and Fidelity China Consumer have respective OCFs of 1.06 per cent, 1.9 per cent and 1.3 per cent.
The Invesco Perpetual Hong Kong & China fund is also a recent top performer but doesn’t yet have a three year track record under the current managers. It has been co-managed Lorraine Kuo and Mike Shiao since June 2012, during which time it has returned 53.84 per cent. No fund in the sector has returned more over the period.
Performance of fund, sector and index since June 2012
Source: FE Analytics
Invesco Perpetual Hong Kong & China has an OCF of 0.94 per cent.
Fans of passives may be tempted by a number of ETFs that attempt to track the Chinese stock market, including iShares MSCI China Index and HSBC MSCI China. There are currently no open-ended Chinese trackers available to UK investors, though.
Investment trusts
There are just two specialist Chinese equity investment trusts, the £657m Fidelity China Special Situations IT and £166m JP Morgan Chinese IT.
Fidelity Special China Special Situations is managed by Dale Nicholls, who took over from star manager Anthony Bolton in April 2014.
Since Nicholls took over the trust from Bolton it has returned 26.56 per cent, compared with the 16.52 per cent rise in the MSCI China index.
Top holdings include Tencent, Alibaba and Citic Securities.
The trust is on a 9.7 per cent discount and is 19 per cent geared. It has an OCF of 1.43 per cent as well as a performance fee that recently boosted charges to 2.43 per cent.
JP Morgan Chinese is co-managed by Howard Wang, Emerson Yip, Shumin Huang and William Tong. Overweight financials, it has its largest holdings in China Construction Bank and Agricultural Bank of China.
Over the past three years it has returned 47.18 per cent, almost doubling the returns of the index.
The trust is on an 8.9 per cent discount and has 8 per cent gearing. It has an OCF of 1.31 per cent as well as a performance fee.
Investors could also scoop up exposure to China via several Asia Pacific ex Japan trusts with overweights to Chinese equities that are also trading on discounts.
JP Morgan Asian has 27.4 per cent in China and is on a 10 per cent discount, Fidelity Asian Values has 26.41 per cent and is on a 9.2 per cent discount, while the Invesco Asian Trust has 20.8 per cent and is on a discount of 10.4 per cent.
Only the JP Morgan Asian trust failed to stay ahead of the MSCI China over three years but all three have returned less than the average trust in the IT Asia Pacific ex Japan sector over the period.
Performance of trusts, sector and index over 3yrs
Source: FE Analytics
JP Morgan Asian has an OCF of 0.8 per cent and is 1 per cent geared. Fidelity Asian Values has an OCF of 1.5 per and is 11 per cent geared, while the Invesco Asian Trust has an OCF of 1.06 per cent and is 3 per cent geared.
