2021 Grand National: Why horses for courses applies to the investment world
With a history dating back more than 180 years, the Grand National is undoubtedly one of the biggest...
The Chinese Year of the Rat draws to a close on 12 February 2021. And what a year it turned out to be. Unaware of what lay ahead when posing the question ‘Will the Year of the Rat be prosperous?’ on 20 January last year, my article began with what a bad rap the animal had, and that actually it was less likely to catch or transmit a virus than dogs and cats!
Considered a year of new beginnings, it certainly became a year of new practices, as the Coronavirus moved us all indoors and online. But despite being the first place where the virus emerged, a quick and effective lockdown meant China’s economy then opened up faster than others around the world. It was the only nation to register growth in 2020, up 2.3%*. In 2021 it is expected to grow by 8.1%*.
The Chinese stock market was equally robust during the Year of the Rat. When the global stock market fell more than 25% in February 2020, the Chinese stock market fell just 10%. It has returned just shy of 40% over the year, compared with 12% for the rest of the world**.
With characteristics including great patience and a desire to make progress, as well as being uninfluenced by others or the environment, it suggests that the Year of the Ox will be positive – albeit possibly with some set-backs along the way.
1. Strong growth in 2021
As already mentioned, China actually posted positive GDP numbers last year, experiencing a strong V-shaped recovery. The government’s quick and comprehensive mobilisation at the start of the pandemic meant that the impact to consumption and business confidence has been largely cyclical and not structural. This means it is well-placed to return to circa 8% GDP this year.
2. Consumption growth
It’s estimated the middle classes will reach more than 1 billion by 2027, underpinning future growth. The economy is still transforming but is in its second phase of consumerism. The first stage is when people start getting disposable income and buy things like white goods. The second is when they move onto brands and higher priced options. There will also be opportunities in the technology required to help companies profit from the changing consumption patterns of the millennial generation.
3. Carbon neutrality
The Chinese government has pledged to be net-zero by 2060, which is hugely significant because China produces about a quarter of the world’s emissions. President Xi also hinted at an acceleration in shorter-term action, with a pledge that emissions would peak before 2030. This will result in a big area of secular growth.
1. Geopolitical tensions
Covid-19 become almost a lightning rod for a situation which had been simmering for years. The pandemic and subsequent significant disruption to the global supply chain, highlighted just how over-reliant on China the West had become. While the rhetoric from the US is likely to be less vitriolic under a Biden presidency, the pressure on China will stay – possibly for many years to come.
2. Regulation of big tech
Like in the US and Europe, questions have been raised as to whether China’s big tech companies have become too powerful and more rules around data protection and antitrust are likely. In November, the central bank and regulators released draft rules on microlending, which included provisions such as capital requirements for technology firms offering loans. China’s State Administration for Market Regulation also published draft rules looking to stop monopolistic practices by internet platforms.
3. Valuations are not cheap
Valuations are not cheap, and the market has had a strong 2019 and 2020. That said, the market continues to trade at a significant discount to the US, despite arguably better growth prospects. On a stock level, while the COVID-19 beneficiaries in particular have done well, there are many laggards and value can still be found in other areas of the market.
This trust invests mainly in firms listed in China and on the Hong Kong Stock Exchange, but also Chinese companies listed on other exchanges around the world. Due to its bias towards smaller and medium sized firms in a developing market, this trust is not for the faint hearted and investors should be prepared for large fluctuations in the value of their investment. But those willing to take the risk could be handsomely rewarded over the long term. Over the Year of the Rat the trust returned 93.5%**.
This fund is run by Martin Lau and Helen Chen. Based in Hong Kong, they look for well-managed businesses with good corporate governance across Hong Kong, China and Taiwan. Martin and the team have shown that they can consistently produce the goods in any type of market environment and the fund has been a firm favourite of ours for a number of years. Over the Year of the Rat the fund returned 38%**.
Managed by Mike Shiao and Lorraine Kuo, Invesco China Equity fund had a name change in October 2019 (it was previously called Invesco Hong Kong & China fund). Exposure to China was historically through investment in shares traded on Hong Kong stock exchanges, but the fund will now have increased exposure to China A shares listed in Shanghai and Shenzhen. The fund has an excellent stock-picking track record. Over the Year of the Rat the fund returned 38%**.
This trust invests in companies which are quoted on the stock exchanges of Hong Kong, China and Taiwan, as well as A shares listed in Shenzhen and Shanghai. The managers are growth-oriented investors who target higher quality companies within a best ideas’ approach to the region, while also paying an income. Performance has been nothing short of exceptional in recent years. Over the Year of the Rat the trust returned 132%**.
*Source: IMF, World Economic Outlook Update, January 2021
**Source: FE fundinfo, total returns in sterling, 25 January 2020 to 5 February 2021