Will Chinese year of the rooster leave investors crowing, or with egg on their face?

The Chinese stock market is a little like a Chinese banquet: extremely varied, with some fantastic looking choices, but also some that may need closer inspection before you dive in…

As we approach the start of a Chinese New Year this Friday, will the year of the rooster be one investors can crow about, or will they end up with egg on their face? Darius McDermott, managing director of FundCalibre, goes through some of the pros and cons:

Pros

  1. Trade: “With the Trans-Pacific Partnership under threat in a Trump administration, China has wasted no time promoting its own Regional Comprehensive Economic Partnership, which is a proposed trade deal between south east Asian countries.”
  2. Growing middle classes: “It’s easy to forget the sheer size of China’s population which, at around 1.4 billion people, is more than four times the size of the United States. As China’s middle class expands, the potential for consumer spending growth is enormous.”
  3. Consumer-led economy: “Speaking of the consumer, some green shoots are finally emerging in the transition to a consumer-led economy. Healthcare, education, auto sales and entertainment are all starting to see some decent growth. Technology is also an interesting area, with some Chinese companies much more advanced than their US counterparts.”

Cons

  1. Corporate debt: “China has a massive debt problem—debt to GDP is around 260%—and the state-owned companies, which are being propped up by some of this debt, are dragging on the economy.”
  2. Property market: “A worry for a few years now, the Chinese property market continues to expand – house prices soared again last year, further inflating the asset bubble.”
  3. Capital outflows: “Over the past few months, capital outflows from China have continued as foreign investors have become more nervous over the outlook and wary of further intervention from the state.”

Funds to consider

Investors considering Chinese equities could take a look at First State Greater China Growth and Invesco Perpetual Hong Kong & China. For a more diversified investment, JOHCM Asia ex Japan currently has 37%* of the fund invested in China & Hong Kong and Matthews Asia Pacific Tiger has 35%* exposure to the market.

*Source: FE Analytics, 30th November 2016

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author and any people interviewed are their own and do not constitute financial advice.