Much has been made about the recent slowdown in the Chinese economy, which has translated in to poor performance for the equity markets. Our data shows that the MSCI China index has lost 4.19 per cent over three years, while the wider MSCI World index has returned 35.68 per cent.
Performance of indices over 3yrs
Source: FE Analytics
However Rabattu, head of global equities at Lombard Odier, says that the recent underperformance of Chinese equity markets will be viewed as a mere blip in years to come as China’s middle class emerges.
"Investors can’t afford to ignore China. It has been the world’s largest and most important economy for most of the last 3000 years and – although Europe and the US may have temporarily overtaken it – it is swiftly regaining this dominance," he said.
"In population terms, it is as big as Europe and North America put together, and that population is young, growing quickly and increasingly wealthy. The average yearly salary in China has increased by almost five times since 1999," he added.
The longer-term numbers are still very much in China’s favour, with the MSCI China index up 373.97 per cent over the last decade compared with 125.79 per cent from the MSCI World.
Rabattu says this long-term outperformance will continue as the economy shifts from an export-driven model to a consumption-led one. He says he is looking to capture those returns in his LO Emerging Consumer fund by investing in companies that will benefit from China’s new middle class.
"The growth in domestic consumption is a multi-year, even a multi-decade trend," he said.
"We are looking to invest in the Chinese equivalents of stocks like Coca Cola – retail or FCMG companies that are well-managed and number-one or -two in their categories, and which will reap the benefits of consolidation, infrastructure improvements, consumer trends and rising disposable incomes, year after year."
Consecutive de-ratings in Chinese equities have led many experts to predict they are now undervalued. Rabattu is one of these and has upped his exposure to the country as a result.
"We have recently increased our allocation to China since equities are starting to look good value again," he said.
"Companies we like include China Resource Enterprises, which we added to the portfolio in April. CRE is the leading beer company in China through a 20-year-old joint venture with SAB Miller called Snow, which has 22 per cent market share."
"The Chinese beer market is still in its infancy compared with the US, so we see considerable potential for further growth and consolidation. Currently, beer consumption in China is 30 litres per capita, compared with over 80 in the US," he added.
Dennehy Weller & Co’s Brian Dennehy (pictured) is of a similar opinion, and is particularly optimistic about the outlook for small and mid cap domestic companies.
Commenting on the fact that so many global and emerging market managers are underweight China at the moment, he said: "I don’t know about you, but it feels like a bit of a contra-cyclical indicator to me.""I can understand why people are worried about China on a macro level at the moment, and I can see them being worried for the next 10 years or so. However, during this transition to a domestically focused economy, a lot of small and mid cap companies could flourish – the kind of companies that are held in [Anthony Bolton’s] Fidelity China Special Situations trust."
Rabattu has run the $636.3 LO Emerging Consumer fund since its launch in October 2011.
Over that time, the fund has returned 34 per cent, compared with 30.85 per cent from its MSCI World index benchmark.
Performance of fund vs index since Oct 2011
Source: FE Analytics
The LO Emerging Consumer fund has ongoing charges of 1.39 per cent and requires a minimum investment of around €3,000.
Carmignac Gestion's Jean Médecin says that increasing urbanisation in China will undoubtedly benefit investors with a long-term horizon.
"Since the credit and infrastructure spending-fuelled recovery of 2009/2010, China's growth has gradually declined," he said.
"China suffers from an unbalanced economy with too much investment and too little consumption. But it still has much to offer investors. While investment contribution to the economic growth has declined over the past three years, consumption contribution has been usefully resilient."
"This consumption will be helped in the years ahead by increasing urbanisation of the population and household income growth, which will boost sectors such as leisure and consumer goods."
"The new Chinese leadership knows what needs to be tackled, including pollution and corruption. Investors dismayed by the lack of reforms announced so far should remember that it is not unusual for new leaders to take their time before enacting new policies."
"It is a good sign that the authorities have resisted the temptation to respond to the economic slowdown by splashing out on credit financed projects with limited economic return: it indicates that China is serious about tackling imbalances in the economy."
Richard Troue, investment analyst at Hargreaves Lansdown, agrees with Rabattu and Médecin. He says investors with a long-term view should consider investing in China – as long as they are willing to put up with bouts of volatility along the way.
"I think that investors with a long-term horizon should certainly keep a close eye on China and now there has been a period of relative underperformance, they should be taking an even closer look," he said.
"What tends to happen if there is any bad news about the global economy, news about the Fed reversing or slowing QE, or negative data out of China, is that people start to think that China’s long-term growth trends are over."
"However, these are multi-decade trends and China isn’t going to change from an export-driven economy to a consumer-services driven one overnight. Of course there will be setbacks along the way, but given Chinese equities' underperformance, now could be the time to top up your exposure."
"What I would say is that if you are an investor with no exposure to China or the surrounding emerging markets, it may be better to hold a broader Asia Pacific fund and bolt on satellite holdings when you see fit," he added.
