Staci West – FundCalibre (Equities, Asia & Emerging Markets)

6 February 2024

The Year of the Dragon is typically associated with good luck and fortitude. But can the Chinese stock market roar for investors in 2024 and beyond?

Since ending its three-year lockdown at the beginning of 2023, China’s stock market has been on a wild ride. China funds have faced setbacks due to economic and geopolitical concerns, causing a majority of them to decline by over 45% in the last three years*. Investor worries include rising authoritarianism, a property downturn, deflation risk, and slowing economic growth in China.

In November, foreign direct investment outflows surpassed inflows for the first time since tensions with the US escalated. However, market fluctuations highlight China as a long-term investment, and for those believing in its long-term potential, the current situation may present a favourable entry point.

Though some sectors like real estate face challenges, targeted government stimulus aims to revive the economy. Fidelity anticipates a “controlled stabilisation” in 2024, with the World Bank estimating a 4.5% GDP growth**. Key drivers for the economy, such as expanded services consumption and increased tourism, are expected to contribute positively.

Diversifying your portfolio with exposure to China

China’s significant role in global economic growth is likely to persist. Looking forward to the next five to ten years, while China remains high-risk, long-term investors may find potential for significant rewards. For those comfortable with higher risk and interested in investing in China, starting with a broad global emerging markets or Asian fund is recommended.

Despite a volatile decade for China, the Allianz China A-Shares fund topped the performance table for IA China/Greater China sector, delivering an impressive triple-digit return of 193.60%***. This return is nearly 70% greater than its nearest peer***. The fund concentrates on the stocks of companies that are incorporated in China and that are listed as A-shares on the stock exchanges of Shanghai or Shenzhen.

Invesco Global Emerging Markets is a highly active fund that consists of around 50 best ideas across emerging markets and currently has 22.7% allocated to China****. The managers look to exploit market inefficiencies caused by investor behavioural biases, giving the fund a slight value tilt. The fund has an outstanding long-term track record and has returned over 34% over the last five years^.

Another contrarian fund is the Federated Hermes Asia ex Japan Equity fund which invests in emerging markets within the Asia ex-Japan region. The manager actively invests in stocks that are currently out of favour but which he believes are likely to perform better in the future and currently holds 43% of the fund in China****.

JPMorgan China Growth & Income trust invests in Chinese companies or those which derive a substantial part of their revenues or profits from these territories. The managers are growth-oriented investors who target higher quality companies within their ‘best ideas’ approach to the region, while also paying an income.

The Guinness Asian Equity Income fund is another option for those looking for income in the region. This fund invests in companies across the whole Asia Pacific region, including Australia, and currently has roughly a third of the portfolio invested in China****. The fund has a current yield of 4.6%****.

*Source: FE Analytics, total returns in sterling, 29 January 2021 to 29 January 2024 

**Source: World Bank, 14 December 2023

***Source: FE Analytics, total returns in sterling, 29 January 2014 to 29 January 2024

****Source: fund factsheet, 31 December 2023

^Source: FE Analytics, total returns in sterling, 1 February 2019 to 1 February 2024

*Source: S&P 500 Equal Weight Index Factsheet, 29 December 2023
**Source: FE Analytics, total returns in US dollars, 1 January 2023 to 29 December 2023
***Source: Guinness Global Investors, Webcast Q3 2023
****Source: Capital Group, 2024 Outlook

Please Note:

This article was first published by Fund Calibre and is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. 

Please speak to Ethical Offshore Investors or your personal adviser BEFORE you make any investment decision based on the information contained within this article.

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