That IMA sector is actually the worst performer over the past three years, while nervous investors are perturbed by economists’ scepticism that GDP growth is nowhere near as high as headline numbers suggest.true
In recent months, UK equity managers have been tilting their portfolios back towards domestic earners, rather than those companies with high overseas, emerging market earnings. There are also warnings that a prolonged Chinese slowdown could have disastrous impact on perceived safe haven economies – Germany is one of its biggest trade partners.
After five, maybe 10 years of banging the China drum, investors have changed their tune. Suddenly, it is China not Europe that has become the contrarian choice. So should you invest directly?
Low valuations?
Even when Chinese growth was buoyant, the market did not soar. Managers are keen to point out that valuations have come down considerably from their giddy heights in 2007.
William Calvert, manager of Polar Capital Emerging Markets Growth and Income funds, says investors need to focus on those areas where there is scope for growth – healthcare, gas distribution and the internet – and away from those areas where there is significant over-capacity.
Elsewhere, Ria Nova, product specialist of the Neuberger Berman China Equity Fund, sees opportunities from the economy’s ongoing restructure away from exports – latest GDP statistics show 56% of growth made up from consumption, compared to 14% from net exports. There is still a lot to unleash in terms of consumer spending.
Interestingly, Nova believes the next trend is for more investors to take direct exposure to China, rather than though global emerging market funds.
She says: “There has been a transition. The large institutions and family offices now have dedicated emerging markets exposure, having previously only held global equity portfolios. The next transition is likely to be to hold dedicated China funds.
“The MSCI emerging market index has 18% in China. If we look at that on a GDP basis, it materially underweights China’s strength. Also historically, the index has avoided any allocation to domestic China A Shares, but as the Chinese Government has opened it up to encourage foreigners to invest in the market, there has been a push for the MSCI to recalibrate.”
If you do see a contrarian opportunity in China then, perhaps it is best to be brave and invest via a dedicated fund rather than a global or Asian fund with a wider remit. Picking out the best funds in a sector where most have failed to deliver is another challenge entirely.
You can read more on Chinese equities in the August edition of Portfolio Adviser, out now.
