After a strong run that has been followed by a more recent pull back there is always a paradox of whether to take profits and run or buy into the ‘discounted’ market.
According to FE Analytics, the MSCI China index has rallied hard of late and is up 55.23 per cent over the past 13 months while the average fund in the IA China/Greater China sector is up 46.25 per cent.
Performance of index since 9 May 2014
Source: FE Analytics
Chinese equities have been boosted since last year by government moves to liberalise the investment market and increase access for mainland China and Hong Kong-listed stocks for investors in either area.
As a result the domestic China A shares market seen a huge spike in investor appetite.
While that market, shown in the above graph as the Shenzhen Stock Exchange index, has rallied hard, those holding shares in the offshore market – also known as H shares – have seen the value of their investments fall over the past two months with the MSCI China down 10.59 per cent and the average fund in the IA China/Greater China sector down 7.5 per cent.
Performance of index over 1yr
Source: FE Analytics
In fact, only one fund has managed to navigate through this period in positive territory: the $304m New Capital China Equity fund, headed by FE Alpha Manager Mansfield Mok. The fund is up 0.56 per cent.
While it is the greatest fall in the index and sector since the 2013 ‘taper tantrum’ knocked back markets worried that the Federal Reserve would scale back quantitative easing, Barings Asset Management believe the recent fall is a good buying opportunity.
Barings believes the recent pull back in the Chinese equity market is a decent buying opportunity as a host of government reforms and economic re-balancing look set to bolster China’s market and broader economy.
It forecasts that these measures will, in the long term, have a profound effect on China as it prepares for the potential for recognition as a market economy by the World Trade Organisation in 2016
“After a strong start to the year, with the MSCI China Index up 20.4 per cent in the five months to 8t June in US dollar terms, the recent pull-back in the market is an attractive opportunity for participation in China’s long-term growth story at a lower entry point,” the firm said.
Barings says that ongoing reform by the Chinese government is helping to accelerate the country’s transformation towards a robust market economy, with a high potential for success in rebalancing to consumption-based system following the annual meeting of the National People’s Congress in March.
The firm says in the very short term there could be further weakness due to the combination of profit-taking after the recent strong run. However, it adds that over the medium to longer term, the investment case remains positive with the Chinese government’s measures to ease policy and advance reforms supportive of both cyclical and structural growth.
David Madden, market analyst at IG, says the correction could have further to run but that he thinks overwhelming commitment to strong markets by the Beijing government will mean the rally will pick up again at some point in the near term.
“We have had a pull-back but the upside view that also things are extremely heated up over there in terms of how much the market has gained, the willingness of the Beijing authorities to do whatever it takes is there,” he said.
“They will ensure that the growth actually is going to be achieved and will support banks to meet capital requirement ratios and help infrastructure projects with financing. It is a bit shaky buying in at these levels but given that we are now only really starting to see the monetary easing policy and a lot that hasn’t taken effect yet.”
“It is just a breather before another leg-up. However, there is certainly a fear here in the West that it is going to blow up.”
Laura Luo, head of Hong Kong China equities at Barings and manager of the £2.6bn Baring Hong Kong China fund, said: “Although the headline pace of economic expansion might slow, the emphasis on reform has increased and will, we think, have significant consequences for China’s economy and market.”
“The measures to improve the return on capital at state-owned enterprises while opening them up to reform, to support the private sector and to encourage further financial sector liberalisation will, in the long term, have a profound effect on China as it prepares for potential recognition as a market economy by the WTO in 2016. If we include recent measures to improve liquidity in the market, our view is that investment conditions are highly favourable in China,” she said.
Luo’s fund fared worse than the index and sector average during the sell-off. Since Luo took over in September 2013 it has outperformed the sector average but underperformed the index.
Performance of fund, sector and index since September 2013
Source: FE Analytics
The manager is currently favouring Chinese firms delivering productivity gains for businesses as well as individuals as she believe they are best positioned to capitalise on the market reforms.
“This encompasses providers of industrial automation solutions as well as some of China’s most dynamic technology companies. Another area Barings is focused on is domestic consumption, given that large numbers of the Chinese population are spending more of their income to raise their quality of life,” she said.
“These are incremental changes in consumer spending, but cumulatively very important as average income rises. This includes spending on tourism and healthcare, as well as education, and we see that consumption continues to be a significant growth area.”
“There are a number of companies benefitting from the initiatives to reform and modernise state-owned enterprises and this represents good opportunities for investors. We also see investment potential in companies engaged in the provision of infrastructure to support on-going urbanisation in China, as well as the reduction of environmental pollution.”
