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05 February 2019

Does the Year of the Pig have a twist in its tail?

At first glance, the Chinese New Year appears to spell out good news on the fortune front: It is the Year of the Earth Pig, an animal which traditionally symbolises wealth, luck and prosperity.

But investors watching events in China over the past year could be forgiven for acting with caution. China-focused equity funds were hit by heavy losses in 2018, with a slowdown in Chinese economic growth and falls for major technology stocks making their mark. E-commerce giant Alibaba, one of China’s ‘BAT’ stocks (a term created to refer to three of China’s largest and most exciting companies) recently announced sales growth was 41% for the final three months of 2018, a slowdown from growth of more than 50% in each of the previous 10 quarters. The company has had to contend with slowing Chinese economic growth, which was 6.6% in 2018 – the lowest increase since 1990. Meanwhile, the shares of another BAT stock, Tencent, were hit by a government ban on new computer games, although they have gone on to recover some of their losses so far this year.

In the latest development in the US-China trade spat, President Donald Trump has said that the “massive tariffs” imposed by the US on Chinese products has “very badly” impacted the nation.

Despite the recent gloom, James Rowbury, Investment Research Coordinator, said: “China is establishing itself as a global leader, following decades of rapid GDP growth and an emerging middle class. While this sounds very positive, China has been a driving force behind the global debt bubble, with total debt accounting for around 300% of its GDP. The country’s borrowing binge came in the wake of the financial crisis, where Chinese authorities opted for investments with short-term benefits: building roads to nowhere and cities with no people. To ease this bubble, China is now moving towards a consumer-driven, domestically-facing economy, with less reliance on debt-exhaustive industrials and exporting industries.

 “Traditionally, the region has been a closed book to foreign investors, despite sustaining the world’s largest equity market at $5.65tn. In January, Chinese authorities doubled the country’s quota for foreign investment into its capital markets, taking the figure from $150bn to $300bn. This was a welcome move from foreign investors’ perspective, and an illustration that the state is further integrating itself into the global economy. Nevertheless, it should be noted that this $300bn still only represents around 6% of the total market value.”

While UK private investors remain unable to gain direct exposure into Chinese equities, there are still various entry points available to UK retail investors via collective investment vehicles.

James said: “As the Chinese market is so large and diverse, it may be prudent to create a blend of strategies to optimise one’s exposure to the region.

“An investment strategy that is focused on the new consumption-led economy is the aptly named Fidelity China Consumer Fund. Targeting the high-growth prospects of companies involved in the manufacture and sale of goods, the fund has achieved five-year annualised returns of 11.09%.”

However, in 2018, the fund generated a negative return of -11.3%, with some of the companies held by the fund, including internet technology company Netease and China Life Insurance experiencing some volatility last year.

James added: “To add exposure to this position, a potential blend opportunity lies with the Fidelity China Focus Fund, where the manager identifies undervalued companies to create a compelling, long-term investment thesis. We feel that an understanding of business cultures is key to making sensible investment decisions in Asia, with both managers now working from their Hong Kong office and studying in South Korea and China respectively.  Our analysis shows that holding both strategies in tandem creates a relatively uncorrelated blend, giving the investor a return profile that could benefit from a range of structural growth scenarios.”

Discrete calendar year performance figures for Fidelity China Consumer Fund (All figures to 31st December)
2014:  7.5%
2015:  3.9%
2016: 21.6%
2017: 38%
2018: -11.3%
 
Ends
Please note, our view does not constitute a recommendation to buy or sell the investments mentioned. Past performance and forecasts are not a reliable indicator of future results or performance. Investments and income arising from them can fall as well as rise in value.
 
Does the Year of the Pig have a twist in its tail?

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