Chinese New Year: are the investment stars aligned in 2019?

5 February 2019 marks the start of the Chinese Year of the Pig and, possibly, a prosperous 12 months: according to Chinese astrology, 2019 is a great year to make money and therefore a good year to invest!

As last year’s Year of the Dog disappointed many (the MSCI China index fell more than 11%*), a more positive year would be welcomed by investors. However, with recent data from China showing the economy has continued to slow, will they they once again be frustrated with returns?

Hard or soft landing?

Every year, for more than a decade now, investors have been worrying about an economic slowdown in China, debating if we will get a ‘hard’ or a ‘soft’ landing. As the economy has been slowing for most of that time now, I’d argue we have already witnessed a soft-landing.

While the overall economic growth rate fell from 6.8%** in 2017 to 6.6%** in 2018, more recent data on exports and imports has suggested the slowdown has gathered pace.

Cautiously optimistic

The fear is that China has become such a powerhouse, that any drop in demand could have a very significant impact on the rest of the global economy. So the world is watching closely.

But, if you take a closer look at the data, it is not quite as bad as it may first appear. For example, while vehicles sales fell for the first time since 1990, the figures came at the end of period of a temporary tax reduction and nominal retail sales ex- autos continued to grow.

Infrastructure spend has also decreased – but due to the government trying to rationalise local government spending. The same can be said about the initiatives taken to de-risk the financial system: government policy is actually to make a deceleration manageable, not to re-accelerate growth.

And, as Rathbone’s Julian Chillingworth pointed out, “Chinese leaders have unparalleled control of economic and social levers, so they should be able to keep the tanker on course, at least for the foreseeable future.”

Funds to consider

For those looking to invest, our preferred Chinese equity funds are Fidelity China Special Situations investment trust, First State Greater China Growth and Invesco Hong Kong & China.

A more diversified approach would be to invest in an Asian equity fund with some exposure to China. We like Schroder Oriental Income (11%*** allocation to China), Guinness Asian Equity Income (24%***) and Matthews Asia Pacific Tiger (37%***).

*Source: FE Analytics, total returns in sterling, 16 February 2018 to 28 January 2019
**Source: AXA Investment Managers, 28 January 2019
***Source: Fund facts sheets, December 2018