Investing in Asia: inflation, supply chains and dividends
In this interview we catch up with Edmund Harriss, co-manager of Guinness Asian Equity Income, to...
1 July 2021 marks the centenary of the Communist Party of China (CCP). Founded 100 years ago in Shanghai, the party has more than 90 million members (equivalent to 1.5 times the population of the UK) and has ruled the People’s Republic of China since 1949.
Celebrations will take place across the country, but the main event will be in Beijing, with the CCP General Secretary Xi Jinping (who has also been President of the PRC since 2013) the guest of honour.
But do investors have anything to celebrate?
Over the past decade, Chinese equity returns have been overshadowed by those from the US, with the S&P500 outperforming the MSCI China index in seven of the last ten years*. Cumulatively, the S&P 500 has posted gains of 339% in that time – more than double the 145% returns of the MSCI China**.
And while 2020 turned out to be a good year for Chinese equities (the MSCI China returned 25.5%*), this year they are struggling with the index down 3.2%*.
But while the average US equity fund has struggled to match the S&P 500 in this time, both the average Chinese equity investment trust and the average Chinese equity fund has managed to outpace the MSCI China index.
China’s economy grew by 18.3% in the first quarter of 2021***, with manufacturing sectors taking the lead, according to Fidelity International. “The pace of the economic recovery in the second and following quarters would rely more on the recovery of the service sector,” the company said. “According to data from domestic travel during the Qing Ming tomb-sweeping Festival in early April, the number of travelers and hotel bookings increased substantially compared with previous holiday breaks, reflecting that pent-up consumption demands may cause a retaliatory rebound.”
Martin Lau, co-manager of FSSA Greater China Growth, believes we will see a strengthening economy in China in 2021. “This year will provide an opportunity for more balanced market growth, perhaps including cyclical stocks and shares whose value took a hit last year,” he said. “As the economy recovers, shares in a wider range of sectors will become more attractive. Last year, just a handful of companies accounted for the majority of the returns. We have already started to see signs of change, hence why we expect this year to be different from the last.”
China’s stock market, like that of the US, is dominated by big tech companies, which led market recoveries last year. Alibaba, Tencent, Meituan Dianping and Xiaomi account for 30% of the MSCI China^, while Facebook, Apple, Amazon, Google (under parent company Alphabet) and Microsoft account for 20% of the S&P500^^.
The days of China being a cheap source of labour are gone but some sectors of the Chinese economy have started to grow quite rapidly, such as pharmaceuticals, software, semiconductors, and the automotive industry.
“China has been upgrading its manufacturing industry – a key aim of President Xi’s latest and previous Five-Year Plans,” continued Martin. “With an attractive base and a competitive, well-educated workforce, China’s manufacturing champions should continue to advance its technology prowess and gain global market share.
In China’s latest Five-Year Plan, the government announced plans to reduce the country’s vulnerability to, and dependence on, the global economy; achieve self-sufficiency; and boost domestic consumption. The government has also introduced subsidies to boost purchases of home appliances and cars.
“We see these trends continuing over the next 5 to 10 years,” said Martin. “As the Chinese economy develops and incomes rise, people will start to think about how they can improve their quality of life. We believe consumer spending, education and tourism are all poised for significant growth and the popularity of domestic brands is increasing.”
At the UN General Assembly in September 2020 President Xi Jinping pledged that the country would become net zero by 2060. This was a surprise move that has been hailed as a significant step forward in the global effort to address the Climate Crisis, given that China is responsible for around 30% of global emissions.
“China has a history of using industrial policy to forge leadership positions in key technologies and so it seems likely that the key beneficiaries will be the domestic companies,” commented Isabella Hervey-Bathurst, global sector specialist at Schroders. “One thing is clear: climate change investors cannot afford to ignore the Chinese market.”
There are of course risks – trade wars and sanctions, for example. But, as Martin Lau points out, the Chinese government is likely to support the economy through measures such as personal income tax cuts and private enterprise financing support. In the medium-to-long term, Chinese companies will be forced to strengthen their core competencies – those that are able to adapt to the new norm should emerge stronger over time, despite trade sanctions.
For those considering investing in China, there are four Elite Rated Chinese equity products: Fidelity China Special Situations, FSSA Greater China Growth, Invesco China Equity and JPM China Growth & Income Trust.
Those looking for a little more diversification could consider Guinness Asian Equity Income fund which has 37% invested in Chinese companies today, or T. Rowe Asian Opportunities Equity, which has a 43% weighting^^^.
*Source: FE fundinfo, total returns in sterling, calendar years 2011 to 2020 and 1 January to 16 June 2021
**Source: Fe fundinfo, total returns in sterling to 16 June 2021
***Source: Fidelity International
^Source: msci.com, 31 May 2021
^^Investipedia.com, June 2021
^^^Source: fund factsheets, 31 May 2021