China’s reopening after three years of Covid restrictions spurred hopes that a rebound was just around the corner, but the recovery is yet to materialise.
The past couple of years have been tough for China investors, as the MSCI China index has fallen -6.6% over the past three years.
There are also concerns about the geopolitical landscape with the tensions between the US and China and a potential escalation with Taiwan. This can be an incentive for investors to look for emerging market funds with a lower correlation to China.
Performance of MSCI China in the last three years
There are, however, arguments to have an exposure to China in a portfolio, either as a standalone or as a complement to a global emerging markets or Asia Pacific fund.
In the short term, Chinese citizens are expected to spend the money they have saved during the three years of strict Covid restrictions.
Catherine Yeung, investment director at Fidelity Asian Values PLC, said: “After strict lockdowns, Chinese people want to meet, travel and spend money.
“It is also worth noting that household savings rates in China have risen from 31% to 35%, so it’s expected that a significant war chest will be channelled into the economy over the next few months.”
In the long term, China aims to evolve from a hub for lower quality and low-cost products to an economic model focused on higher quality manufacturing and innovation.
Trustnet has asked three fund selectors to pick a fund for investors looking to up their exposure to China.
Carly Moorhouse, equity research analyst at Quilter Cheviot chose Fidelity China Consumer to benefit from the long-term transformation of the Chinese economy, as more people move into the middle class and spend their increased disposable incomes.
She said: “The fund is managed by experienced portfolio manager Hyomi Jie who, outside of Covid restrictions, would undertake her own primary research, staying with a Chinese family in different parts of China every year for two weeks to better understand what they are consuming, in terms of both goods and services, as well as how they are doing so.
“This proprietary research gives her a competitive edge in really understanding the nuances of this particular market.”
Performance of fund over 10 years against sector and index
Source: FE Analytics
The fund outperformed both the IA China/Greater China sector as well as the MSCI China index over 10 years.
Considering the theme of the fund, its overweights are consumer cyclical and consumer defensive. It also has sizeable allocations to communication services and financial services.
China differs from developed markets as it trades three different types of shares. H-shares are traded on the Hong Kong stock exchange in Hong Kong Dollars and are accessible for any investor. The Shanghai and Shenzhen stock exchanges trade A-shares in Yuan and are the preserve of Chinese citizens. B-Shares are also traded in mainland China and can be bought and sold by foreigners.
Jasper Thornton-Boelman, investment director at Parmenion prefers A-shares because they are less correlated to the wider emerging market universe than H-shares.
He said that Parmenion uses Allianz China A Share Equity to gain a direct exposure to China, as it “gives us a way to improve diversification, particularly in our higher risk models.”
Over 10 years, the MSCI China A Onshore index has a correlation ratio of 0.51 with the MSCI Emerging Markets. In comparison, the correlation ratio between the MSCI China and MSCI Emerging Markets is 0.77.
Performance of fund over 10 years against sector and index
Source: FE Analytics
Allianz China A Share Equity offers a direct exposure to the domestic Chinese stock market. The top five holdings are Kweichow Moutai, Citic Securities, Contemporary Amperex Technology, East Money Information and China Tourism Group Duty.
There are also options for investors who want the best of both worlds.
Lorenzo La Posta, fund manager at Momentum Global Investment Management (MGIM) selected the Hereford Bin Yuan Greater China CI , which MGIM uses as its main exposure to the Chinese equity market.
He said: “The strategy is managed by an experienced team who have almost 20 years of live track record in the Chinese equity market and very good numbers to back that up.
“Headquartered in Shanghai, they are well positioned to understand both the onshore and offshore segments. The company is fully employee-owned, which creates an alignment of interest that we like, particularly when investing with a team over the long run.”
Performance of fund over 10 years against sector and index
Source: FE Analytics
The fund was launched in April 2018 and has outperformed both the MSCI China benchmark and the FO Equity – Greater China sector over the past two years.
The majority of the fund’s allocation (66%) is in A-shares but it also has a significant exposure (31%) to H-Shares.
La Posta added that MGIM particularly likes the fund’s efforts in integrating environmental, social and governance considerations in their investment process.