It's always a little unnerving when the stock market of the world's second-largest economy falls by more than 15 per cent over the course of a few months.
This is indeed what has happened to the Shanghai Composite year to date. As a point of comparison, the MSCI All Country World index is up 4.06 per cent so far in 2018.
Performance of indices in 2018
Source: FE Analytics. Total returns in sterling terms
This could partially be the result of trade war fears. What is often forgotten though, is that China's move from a manufacturing-led economy to a consumer-driven one has progressed significantly. Matthews Asia's Andy Rothman recently said China boasts “the world's best consumer story”; in the first half of 2018, consumption accounted for 78.5 per cent of GDP growth and, over the same time frame just five years ago, it accounted for 45.2 per cent.
In fact, he said that economic fundamentals in the country tell a completely different story from its lacklustre stock market. Even aside from China's consumer story, industrial profits rose 21.1 per cent year-over-year in May, industrial margins are at their highest level in eight years and industrial value-added (which measures the improvements a company makes to its product before selling it to customers) rose 6.6 per cent in the first half of the year.
Here at FundCalibre, we don't have a strong view on any particular area of the market at the moment. But on a relative basis, we think now could be a good time to increase some exposure to Asia and emerging markets while they're relatively cheap.
Below are three funds which should give investors decent exposure to Chinese equities via a wider Asian equity fund, and two for those who have more long-term, country-specific conviction.
Matthews Asia Pacific Tiger
Headed up by Sharat Shroff and Rahul Gupta, this fund has a notably low turnover and is low beta, which means it is much less volatile than its benchmark. Sharat has a very long-term view when it comes to stock selection, as he believes the best opportunities for wealth creation come from a market reformation and when household incomes begin to rise.
He focuses on quality businesses which can survive and generate sustainable earnings, regardless of where we are in the Asian market cycle. Good corporate governance is also a necessary requirement. The fund has a 37.8 per cent weighting to Chinese equities.
Schroder Asian Alpha Plus
Manager Matthew Dobbs adopts a completely unconstrained approach to stock selection, picking out market inefficiencies at a stock level where Schroder's extensive team of analysts and their in-depth research can give him an advantage over other investors.
While he has a strong valuation discipline and focuses on individual company traits such as strong earnings growth and sustainable returns, Matthew will also take a country allocation view, as he believes this can be an important source of returns. At the moment, the fund has approximately 30 per cent in China which, while still a decent exposure, is a relative underweight compared to its MSCI AC Asia ex Japan benchmark.
JOHCM Asia ex Japan
This fund is genuinely benchmark-agnostic and, unusually, it has never held a number of the well-known mega-cap Asian stocks in its portfolio. Managers Samir Mehta and Cho-Yu Kooi instead use their advantage of being locally-based and being able to speak several Asian languages to build a high-conviction 40-stock portfolio of lesser known stocks. The fund is well-diversified in terms of region. While it is underweight Chinese equities, it still offers investors a 23.8 per cent exposure.
Fidelity China Special Situations
For those who are feeling a little braver and want to allocate some of their portfolio to a China-specific offering, Fidelity China Special Situations could be a good option. The investment trust is headed up by Dale Nicholls, who is able to make use of Fidelity's investment licences in China to invest in both A-listed and B-listed shares. Dale analyses companies rather than economies, focusing most of his attention on small and medium-sized firms as he believes they are under-researched and offer better growth prospects. The trust's largest overweights relative to its MSCI China benchmark include China Pacific Insurance Company, biotech company Hutchison China Meditech and investment management firm Noah Holdings.
Invesco Perpetual Hong Kong & China
Alternatively, investors may wish to consider Mike Shiao and Lorraine Kuo's Invesco Perpetual Hong Kong & China. It has a genuinely multi-cap approach and will hold anywhere between 30 and 60 stocks at any one time, meaning the portfolio can be highly-concentrated at times.
The managers believe there are pockets of sentiment-driven inefficiencies in both the Chinese and Hong Kong stock markets, which they aim to exploit through disciplined bottom-up stock research. It currently has a 42.29 per cent weighting to mainland Chinese equities and a 42.17 per cent weighting in Hong Kong-domiciled stocks.
Darius McDermott is managing director at FundCalibre. The views expressed above are his own and should not be taken as financial advice.