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Is it time to invest in China? – 2 fund ideas

Symbolic of success, strength, and power, can China make the most of the Year of the Dragon? We take a closer look and share 2 fund ideas.
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Last year was the Year of the Rabbit, usually linked to gentleness and serenity, but for Chinese investors, 2023 was far from peaceful. The question, whether the economy would meet its 5% target – the lowest in decades – sparked debate among analysts and economists throughout the year.

While the economy did crawl over the line with record full-year gross domestic product (GDP) growth of 5.2%, meeting this target doesn’t hide the ongoing challenges facing policymakers. Deflation, debt, record youth unemployment and a declining population are just a few.

Monetary policymakers have taken broad, gradual measures to support the economy. However, we haven’t seen a ‘bazooka’ or game changing policy to reassure the market which is calling for decisive action.

Any major developments here could help boost confidence and offer some short-term market support. But if this is fuelled by more borrowing, it could do more harm than good in the long run.

China’s stock market performance in 2023 was bleak. Over the year, the FTSE China index fell 16.63%, mainly because of challenges in real estate. And given the weighting of China in Asian and Emerging Market indices, its impact at a regional level was significant.

Sentiment isn’t positive to say the least and it looks like investors are starting to run out of patience. Foreign direct investment (FDI) into China turned negative for the first time since the late 90s and data from the Investment Association (IA) is showing sustained outflows from China/Greater China Funds over the 12 months to November 2023.

Our most recent survey highlights that investor confidence towards broader Global Emerging Markets has been increasing since November. But, over the same time, flows on our platform into IA China/Greater China funds are negative.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice.

Strap in for further volatility

As we approach the Year of the Dragon, the world’s second biggest economy looks like it’s on a tough path. Even with recent setbacks, the symbolism of the Dragon – success, strength, and power – looks like the Chinese markets we’ve seen over its multi-decade climb. But remember, past performance isn’t a guide to the future.

The dragon’s also associated with being brave and courageous, two things that look crucial for investing in China right now. But there still might be reasons to be optimistic.

While economic growth has slowed, it’s still expected to outpace the developed world. In 2024, the IMF is forecasting 4.2% GDP growth versus 1.4% for advanced economies and 2.9% globally.

With all this uncertainty, Chinese shares are trading at very depressed valuations and below their average over the past 30 years. We think investors have readjusted their expectations and low valuations are usually associated with higher future returns, although there are no guarantees.

Valuations tend to be good indicators of where sentiment is today. This suggests there are opportunities for investors willing to look past the noise.

Our conversations with fund managers have painted a mixed picture. While some are staying cautious on the outlook, others believe some companies are offering compelling value at current market prices.

There’s no hiding that China has seen a structural slowdown in growth, but with the valuation picture right now and looking at the next five to ten years, this could prove an attractive entry point. But still, investors should be prepared to ride out the ups and downs.

2 fund ideas to consider for China

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.

Remember, all investments can fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

FSSA Greater China Growth

FSSA Greater China Growth is managed by Martin Lau. Martin and his team look for high-quality companies primarily operating in China, Hong Kong, and Taiwan.

They prefer companies with a competitive advantage that others struggle to replicate, like a well-known brand or the ability to raise prices without affecting demand from customers.

Companies should also have the potential to grow earnings sustainably over the long term and be run by reputable management teams that avoid taking unnecessary risks in pursuit of short-term gains.

The fund invests in emerging markets and smaller companies which both add risk.

JPM Emerging Markets

For the JPM Emerging Markets fund, Leon Eidelman and Austin Forey hunt for businesses that can sustain earnings growth over the long term. They believe most investors underestimate the potential for share price growth in companies that can do this.

They pay close attention to the financial strength of a business, the quality of the management team and the decisions it takes, and the level of corporate governance.

They’re supported by a wider team of analysts who do extensive research and provide new ideas. They typically travel across the region to visit companies and get insight into what’s happening in different economies. As at the end of December 2023, China and Hong Kong collectively made up around 25% of the fund.

The fund invests in emerging markets which adds risk.

Annual percentage growth

Jan 19 – Jan 20

Jan 20 – Jan 21

Jan 21 – Jan 22

Jan 22 – Jan 23

Jan 23 – Jan 24

JPM Emerging Markets

17.27%

37.11%

-18.38%

-4.22%

-8.17%

FSSA Greater China Growth

14.29%

42.11%

-3.87%

-1.97%

-25.90%

FTSE China

1.16%

52.15%

-25.12%

-7.60%

-35.62%

Past performance isn't a guide to future returns.
Source: *Lipper IM to 31/01/2024.
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Written by
Henry Ince
Henry Ince
Investment Analyst

Henry is a member of our research team, having recently re-joined HL in 2023 after working in asset management for several years. His expertise is deployed writing insightful analysis across a range of sectors including the UK Smaller Companies, Global and Asia & emerging market fund sectors.

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Article history
Published: 9th February 2024