Although China’s economic growth had slowed towards the end of last year, China appears to have avoided the worst of the global downturn. Growth remains robust, helped by the government’s early stimulus measures last November, the success of which has surprised even the optimists.
Chinese growth for 2009 is forecast to be 8% - this compares favourably to the UK economy which is expected to contract by as much as 4.5%. The Jupiter China Fund, which celebrated its third anniversary in October, has been a beneficiary of Chinese economic strength. Since its launch, the fund has grown by a staggering 67% (Source: Lipper Hindsight, 20/10/06 - 2/11/09), although it has been a volatile area and past performance is not a guide to the future.
Source: Lipper
Full year performance figures before this date are not available
Past performance is not a guide to the future
More significant is how this growth has been achieved. Exports have historically been a large contributor, but more recently growth has come from the domestic economy. A rise in the demand for consumer goods driven by high savings and government subsidies has fuelled this growth. Consumers remain cash-rich and have low debt - the fund’s exposure to the consumer sector has therefore proven positive for overall performance.
As the economy shifts from export-led growth towards domestic consumption, China might be heading for its first trade deficit since 1993. However, given its enormous foreign reserves this should not be an impediment to growth.
Unlike developed markets which have suffered in the credit crunch, China has not experienced problems with its banking industry. The banks have performed well over the last few years and this has played a large part in driving the economy. Bank lending has been on the increase and is expected to rise by 33% this year, although this is expected to slow in subsequent years as the government strives to avoid a property bubble. The fund currently has a 32% exposure to the financials sector which includes banks and insurance companies, and this positioning is expected to deliver good returns.
Reforms across other sectors like healthcare and education are also changing the character of China’s investment landscape, meaning that growth in China is coming from a variety of sectors.
Infrastructure remains a powerful source of growth. One interesting project is the high speed rail network, which is being extended with 35 additional routes by 2012. Better transport links should facilitate further economic growth. One company expected to benefit from this is Hollysis Automation Technologies, which provides software for the rail network and is a recent addition to the fund.
Although the Chinese market has performed extremely well this year, there are fears that the valuations of some companies are overstretched. The fund tends to have a bias towards small and medium-sized companies, and here Philip Ehrmann believes valuations remain attractive given that he expects these companies to generate 25-30% earnings growth.
One of the ongoing issues in China has been the lack of corporate transparency. Companies have in the past been known not to disclose the full details to potential investors, but as more companies come to the market and compete on a global scale, better accounting standards will need to be adopted and the situation is therefore improving.
An investment in China is not a one way bet, and investing in any emerging market is a higher risk strategy. Philip Ehrmann’s approach of holding a concentrated portfolio of smaller companies increases the risk further, and as such this fund is aimed at sophisticated investors who should only consider the fund if they are comfortable with the risks involved.
There could easily be some short-term weakness in China following the strength in the market this year, but Philip Ehrmann expects companies with strong earnings growth to perform. He also believes any short-term weakness should create an excellent buying opportunity.
We continue to rate Philip Ehrmann as a top quality fund manager, and believe the Jupiter China Fund is an excellent way to gain long-term exposure to the country’s remarkable growth prospects.
Meera Patel, Senior Analyst
>Key Features of the Jupiter China Fund
Chinese growth for 2009 is forecast to be 8% - this compares favourably to the UK economy which is expected to contract by as much as 4.5%. The Jupiter China Fund, which celebrated its third anniversary in October, has been a beneficiary of Chinese economic strength. Since its launch, the fund has grown by a staggering 67% (Source: Lipper Hindsight, 20/10/06 - 2/11/09), although it has been a volatile area and past performance is not a guide to the future.
| % Growth 01/11/2006 To 01/11/2007 | % Growth 01/11/2007 To 03/11/2008 | % Growth 03/11/2008 To 02/11/2009 | |
|---|---|---|---|
| Jupiter China | 109.53 | -59.63 | 96.23 |
| IMA Asia Pacific ex Japan | 56.67 | -43.38 | 55.61 |
Full year performance figures before this date are not available
Past performance is not a guide to the future
More significant is how this growth has been achieved. Exports have historically been a large contributor, but more recently growth has come from the domestic economy. A rise in the demand for consumer goods driven by high savings and government subsidies has fuelled this growth. Consumers remain cash-rich and have low debt - the fund’s exposure to the consumer sector has therefore proven positive for overall performance.
As the economy shifts from export-led growth towards domestic consumption, China might be heading for its first trade deficit since 1993. However, given its enormous foreign reserves this should not be an impediment to growth.
Unlike developed markets which have suffered in the credit crunch, China has not experienced problems with its banking industry. The banks have performed well over the last few years and this has played a large part in driving the economy. Bank lending has been on the increase and is expected to rise by 33% this year, although this is expected to slow in subsequent years as the government strives to avoid a property bubble. The fund currently has a 32% exposure to the financials sector which includes banks and insurance companies, and this positioning is expected to deliver good returns.
Reforms across other sectors like healthcare and education are also changing the character of China’s investment landscape, meaning that growth in China is coming from a variety of sectors.
Infrastructure remains a powerful source of growth. One interesting project is the high speed rail network, which is being extended with 35 additional routes by 2012. Better transport links should facilitate further economic growth. One company expected to benefit from this is Hollysis Automation Technologies, which provides software for the rail network and is a recent addition to the fund.
Although the Chinese market has performed extremely well this year, there are fears that the valuations of some companies are overstretched. The fund tends to have a bias towards small and medium-sized companies, and here Philip Ehrmann believes valuations remain attractive given that he expects these companies to generate 25-30% earnings growth.
One of the ongoing issues in China has been the lack of corporate transparency. Companies have in the past been known not to disclose the full details to potential investors, but as more companies come to the market and compete on a global scale, better accounting standards will need to be adopted and the situation is therefore improving.
An investment in China is not a one way bet, and investing in any emerging market is a higher risk strategy. Philip Ehrmann’s approach of holding a concentrated portfolio of smaller companies increases the risk further, and as such this fund is aimed at sophisticated investors who should only consider the fund if they are comfortable with the risks involved.
There could easily be some short-term weakness in China following the strength in the market this year, but Philip Ehrmann expects companies with strong earnings growth to perform. He also believes any short-term weakness should create an excellent buying opportunity.
We continue to rate Philip Ehrmann as a top quality fund manager, and believe the Jupiter China Fund is an excellent way to gain long-term exposure to the country’s remarkable growth prospects.
Meera Patel, Senior Analyst
>Key Features of the Jupiter China Fund
