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27 January 2017

Trump ruffles feathers ahead of the Year of the Rooster

The Chinese New Year of the Fire Rooster begins tomorrow (Saturday 28th January). Traditionally, on this day, people see in the New Year by cleaning their homes, ‘sweeping away’ bad luck and ushering in better fortunes. Red envelopes, stuffed with "lucky money", are given to children, along with written wishes for their kids to grow up healthy.

 

The sign of the rooster is traditionally associated with optimism and confidence. However, given volatility in the region last year, investors would be forgiven for treading carefully. The slowdown of Chinese economic growth has been a major concern, and around this time last year, concerns about the nation’s slowing economic growth impacted global stock markets, with the FTSE 100 hovering below 6000 in February 2016.

 

In 2016, China’s economy grew by 6.7 per cent, compared with 6.9 per cent a year earlier. China’s debt to GDP ratio currently stands at more than 200 per cent, compared to 160 per cent in 2005, and the impact of US President Donald Trump’s isolationist stance, with the threat of 45 per cent tariffs on imports from China and calls to name the country as a “currency manipulator”, has yet to be seen.

 

Chris Price, Investment Specialist at Redmayne-Bentley, comments further on the outlook for China, and investment opportunities.

 

“The Chinese economy has grown rapidly since economic reforms were introduced in 1978. Back then, the country’s economy was ranked as the 9th largest in the world with gross domestic product of US$214bn. The economy grew at an average rate of 9.4 per cent between 1978 and 2012 and by 2013, it was the second largest economy, behind the US, at a size of US$9.2tn. This growth has been driven by China becoming the world’s manufacturing hub as well as stimulus measures introduced by the government following the global economic crisis in 2008. The measures supported investment programmes, driving a need for commodities, but household consumption remained low. Therefore, further policies have been put in place to establish a more balanced economy, which has tempered the level of growth.

 

“Since 2012, the economy has slowed and the government’s target for 2016 is to achieve growth of between 6.5 and 7 per cent. Whilst somewhat lower than the historic levels, it still appears to be an impressive number. In the third quarter of 2016, the economy grew at an annualised rate of 6.7 per cent. However, a number of commentators do question the validity of the figures, and believe actual growth is lower. Despite this, a seven-month high for inflation and strong manufacturing data in December, due to a housing boom and infrastructure investment, imply the economy is recovering from the recent relative slowdown.

 

“Lack of knowledge of many Chinese companies may deter investors. Another factor to be considered is currency; the Chinese currency, Renminbi, is artificially pegged to the US Dollar, meaning a potential UK investor will have to factor in US$/Sterling exchange rate movements. Sterling has weakened considerably against the Dollar since the ‘Brexit’ vote. It should be borne in mind that an investor can gain indirect exposure to China via commodity stocks, as it is a major consumer of copper, iron etc, and so has been a major driver of mining company share prices, a large number of which are London-listed.

 

“However, if one wishes to have direct exposure it could be beneficial to use collective investments, which have the benefit of being professionally overseen, and are generally cheaper and easier than investing directly into a number of individual stocks.”

 

Two options to consider are the following investment trusts:

 

Fidelity China Special Situations

 

This trust was launched by star investment manager Anthony Bolton in 2010, with the objective of long-term capital growth. The fund has a market capitalisation of close to £1bn and currently trades on a discount of over 12 per cent to net asset value (NAV). Since 2014, it has been managed by Dale Nicholls, who has made a promising start, following a long handover process. Its largest holdings include e-commerce company Alibaba, China Petroleum, Citic Telecom International and pharmaceutical and healthcare group, Hutchison China Meditech.

 

Last year, the fund announced the board was looking to increase exposure to unlisted companies from 5 to 10 per cent of gross assets. This was due to a shortage of new listings, as more Chinese companies chose to wait until a later stage of development before going public.

 

JP Morgan Chinese IT

 

This is a much smaller fund, with a market capitalisation of £146m, but also trades on a significant discount to NAV. The fund also seeks long-term capital growth but its mandate extends to what it terms “Greater China”, incorporating Hong Kong and Taiwan. Amongst its largest holdings are insurance companies, Ping An Insurance and China Taiping Insurance, and internet services provider, Tencent.

Please note, our view does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value and you may lose some or all of the amount you have invested. There is an extra risk of losing money when shares are bought in some smaller companies as there can be a big difference between the buying and selling price.

Trump ruffles feathers ahead of the Year of the Rooster
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