China investment best through global EM or Asian funds

China investment is a consideration in the Year of the Ox, if a cautious one. Jason Hollands of Best Invest suggests a focus on the Chinese consumer.

 China investment

Friday 12 February is Chinese New Year. According to the Chinese lunar calendar, 2021 will be the Year of the Ox. In Chinese culture the Ox is consider a much valued, hardworking and honest animal. These are certainly qualities that the Chinese authorities will need to exhibit over the coming year given concerns over its perceived cover-up of the emergence of covid-19, the clampdown in Hong Kong and growing international disquiet over Chinese trade practices.

US-China trade tensions are here to stay

President Trump fired the starting pistol on a trade war with China four-years ago, significantly raising tariffs on Chinese imports. And while we can certainly expect a change in style from the Biden administration, it would be wrong to assume that Donald Trump’s departure from the White House will bring an end to Sino-US trade (and military) tensions any time soon. Hawkishness towards China is one area of policy that bridges the US Congressional divide.

In recent Senate nomination hearings, Janet Yellen, the high-powered new US Treasury Secretary, described China as “clearly our most important strategic competitor”. Furthermore, she pledged the use of a “full array of tools” to “take on China’s abusive, unfair and illegal practices” accusing China of “undercutting American companies by dumping products, erecting trade barriers and giving illegal subsidies to corporations,” as well as “stealing intellectual property”.

Chinese growth set for a strong year

Yet despite the prospect of ongoing trade tensions that may last for many years to come, it is also the case that the Chinese economy was the first major one to return to growth last year, having locked-down both swiftly and aggressively. There is understandably a degree of scepticism towards Chinese official data but the IMF forecast Chinese GDP to experience 8.1% growth this year, a rate only surpassed by India amongst the larger nations. Some investment banks are even more bullish in their forecasts than the IMF.  Providing China can avoid a major new outbreak of covid-19, which it has appeared to so far, the economic recovery looks set to be led by growth of the Chinese consumer.

It is easy is to be dazzled by very large numbers when considering investing in China. It has the largest population on earth at 1.4 billion (though is set to be overtaken by India by the end of the decade) and is the second largest economy after the US when measured by headline GDP and on path to eclipse the US by 2028 (five years earlier than previously forecast, due to covid-19). But it is also a country where the population is ageing and the workforce starting to shrink and where the markets can be prone to political interference, so the opportunities need to be tempered by consideration of the challenges and risks.

Tread carefully

As an investor, it is also important not to lose sight of the fact that you cannot invest directly in GDP or population figures, only what is actually available to invest in, that is, equities and bonds. In the case of Chinese equity markets, these are a complex maze to navigate as they include a great many State-Owned-Enterprises where the goals of the Chinese Communist Party rank higher than those of overseas shareholders.

It is also the case that China may be huge and its share of financial markets undoubtedly growing, Chinese companies currently represent around 5.2% of global markets (as measured by the MSCI AC World Index). It is also important to recognise that many developed market businesses, including UK listed companies such as Burberry, generate significant earnings from Chinese consumers and therefore investing in Chinese listed companies you may know little about is certainly not the only avenue to profit from the growth of the Chinese consumer.

How to tap in to the Chinese consumer

In my view, most private investors do not need to invest in specialist China funds to participate in the growth of the Chinese consumer, but can get this through both global emerging market funds or Asian funds, where the risk/rewards are constantly measured against other dynamic developing markets such as India.

One of self directed investor platform Bestinvest’s key fund picks for getting exposure to the Chinese consumer is the Aubrey Global Emerging Market Opportunities fund. It has returned 166% over the last five years, beating both the MSCI Emerging Markets and MSCI China indices. The lead manager of the fund is Andrew Dalyrmple, a highly seasoned investor who began his career in the 80s working for Cazenove and went on to work in Hong Kong for James Capel and UBS Warburg. He spent many years at Stewart Ivory, before founding Edinburgh based boutique Aubrey Capital where he has been the lead manager of the Aubrey Global Emerging Market Opportunities fund since launch in 2015.

The fund invests globally but is currently 53.6% invested in China. In particular, the fund has strong focus on the growth of the emerging market consumer with 39% invested in consumer discretionary stocks and 29% in consumer staples. Examples of some of the stocks held include Bilibili, one of China’s leading internet content providers; Li Ning, a leading domestic sportswear brand, Geely Automobile and Mengniu Dairy.

Jason Hollands is managing director of Bestinvest.

Further reading: Investing in China – The key themes

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