Chinese New Year of the rooster: Investment company managers comment on prospects for China

The AIC has collated fund manager views on China and has published a table of investment companies with the highest exposure.

Saturday 28 January ushers in the Chinese New Year of the Rooster. Roosters are characterised as trustworthy, with a strong sense of timekeeping and responsibility at work, but also, more ominously, outspoken and daring. The Association of Investment Companies (AIC) has collated fund manager views on China, and has published a table of investment companies with the highest exposure (see below).

A full round up of comments is below, but a strong theme emerging amongst managers is the focus on 'new' China as it transitions to a consumer and services led economy.

Nicholas Yeo, Head of Equities, China and Hong Kong and manager on Aberdeen New Dawn and Aberdeen Asian Smaller Companies investment trusts said: 'External shocks to growth are most likely to come in the form of trade tariffs if US President Donald Trump succumbs to his anti-globalisation instincts. This would curtail Chinese exports in the short term, and have a knock-on effect on bank lending and manufacturing. In the long term, however, it would compel policymakers to accelerate structural reform of outmoded state-owned sectors.

'We believe China has the resources and policy tools to guard against financial instability. To preserve growth, we can expect Beijing to step in and stimulate its economy, more likely through infrastructure spending than a return to property stimulus. It's all part and parcel of China's boom-bust transition from an insulated and impoverished nation of farmers to a liberalised and prosperous global powerhouse. For investors it translates into stock market volatility.

'China's resolve to achieve economic self-dependence, combined with its increasingly wealthy population, will drive demand for consumer goods, in our view. This is where we are concentrating our search for companies. Consumer areas, be they discretionary or durables, are among the least controlled.'

Dale Nicholls, portfolio manager, Fidelity China Special Situations plc said: 'When I speak to companies in China, Trump and the US is not a major talking point, partly due to the lack of real clarity around policy but also because the companies continue to focus on the significant domestic market opportunities ahead of them. The trust continues to be heavily weighted in companies set to benefit from the growth and development of the domestic consumer as opposed to overseas markets that could become tougher to access. The bigger risk in China in my view remains the growth in credit, and while we have seen signs of this slowing, particularly in the so-called shadow banking area, more progress needs to be made here.

'As a stock picker, one of the biggest disappointments under the current regime has been the lack of state owned enterprise (SOE) reform. However, the year of the rooster could see some progress here. We have seen some pockets of SOE reform, such as some company management teams having their pay more aligned to shareholder returns. Big wholesale SOE changes have so far eluded us, but there have been signs this could change.

'Overall, the portfolio continues to focus mostly on 'New' China and invests in areas of the market related to China's modernisation. In the year of the rooster I continue to see significant opportunities and continue to concentrate investments in companies related to consumption and the changing ways people consume.'

Roddy Snell, Deputy Manager, Pacific Horizon Investment Trust said: 'China's growth rate is slowing, but this does not mean the country is on the verge of economic collapse. Amid all the gloomy headlines, it is easy to lose sight of the fact that China is undergoing a planned economic transition from an investment to a consumer and services led economy, which is imperative to securing the long-term success of the country. Yes, there will be casualties from the old economy, in particular the state owned enterprises that continue to destroy capital and the country's banks that fund their operations, but it would be foolish to dismiss Chinese companies as an investment opportunity outright.

'For those with long-term investment horizons able to look beyond the current environment of slower GDP growth, the new consumer-led economy presents investors with a number of the most interesting investment opportunities in the emerging markets universe. There are three core drivers of this consumption story: economic rebalancing; innovation and technology; and, China's world class technology companies. Combined, these are likely to make China one of, if not the, world's best consumption stories.'

Howard Wang, Manager, JPMorgan Chinese Investment Trust said: 'Investors could potentially see a further tightening of financial conditions in China in response to pressure on the currency, as authorities attempt to buy time for an easing in the US dollar rally. However, when combined with the continued tightening of measures targeted at overheating in the residential property market, China may find itself flirting with a growth slow-down that could reverse the rally in industrial and commodity equities.

'However, as long-term bottom-up stock pickers primarily looking for quality growth franchises, we believe 'New China' businesses should broadly outperform over longer time periods as interest in industrial Old China declines. With improving access to the onshore China markets and what we believe to be the eventual inclusion of A-shares in global indices, the A-share market will increasingly offer the type of companies that reflect the dynamic and growing domestic economies which make up the evolving economic composition of New China.

'We are currently invested in the consumer, healthcare, technology/internet and environmental services sectors which we believe will offer the most exciting investment opportunities over the next couple of years. With a new interest rate regime on the horizon, we believe beneficiaries of the reflationary environment have grounds to gain as well.'

Ian Hargreaves, Manager of Invesco Asia Investment Trust said: 'While China's economy is showing signs of stabilisation, this improvement has been accompanied by continued high levels of credit growth and an over-reliance on investment. Our view is that China's economy can probably manage high debt levels for some years to come, as long as it is funded by domestic savings and not dependent on foreign capital. However, these trends need to be closely monitored as they are not sustainable. In particular, we are watching trends in the banks' loan to deposit ratios as a key way to gauge the economy's vulnerability to a liquidity shock. In the meantime, we continue to have significant exposure to China, although with a clear preference for exposure to the 'new economy' and favourable structural growth trends in domestic consumption.'

Investment companies with highest exposure to China, Hong Kong and Taiwan

Company	AIC sector	% China	% Hong Kong	% Taiwan	% Total
JPMorgan Chinese	Country Specialists: Asia Pacific	84.30	5.50	9.10	98.90
Fidelity China Special Situations	Country Specialists: Asia Pacific	39.32	37.91	2.65	79.88
JPMorgan Asian	Asia Pacific - Excluding Japan	33.60	11.90	12.20	57.70
Invesco Asia	Asia Pacific - Excluding Japan	20.56	19.63	13.40	53.59
Martin Currie Asia Unconstrained	Asia Pacific - Excluding Japan	0.00	41.59	7.40	48.99
Pacific Horizon	Asia Pacific - Excluding Japan	31.00	3.00	13.00	47.00
Schroder AsiaPacific	Asia Pacific - Excluding Japan	7.50	21.02	15.41	43.93
Schroder Asian Total Return	Asia Pacific - Excluding Japan	2.30	24.13	14.85	41.28
Schroder Oriental Income	Asia Pacific - Excluding Japan	4.22	18.13	15.03	37.38
Henderson Far East Income	Asia Pacific - Excluding Japan	17.50	6.57	10.88	34.95
Aberdeen New Dawn	Asia Pacific - Excluding Japan	8.25	20.99	5.69	34.93
JPMorgan Global Emerging Markets Income	Global Emerging Markets	15.00	1.30	18.60	34.90
Edinburgh Dragon	Asia Pacific - Excluding Japan	5.55	22.09	6.80	34.44
Fidelity Asian Values	Asia Pacific - Excluding Japan	12.34	9.86	10.36	32.56
Aberdeen Emerging Markets	Global Emerging Markets	15.00	5.00	9.00	29.00
Templeton Emerging Markets	Global Emerging Markets	19.50	0.00	9.20	28.70
Witan Pacific	Asia Pacific - Including Japan	11.57	12.66	4.22	28.45
JPMorgan Emerging Markets	Global Emerging Markets	18.70	0.40	9.10	28.20
Scottish Oriental Smaller Companies	Asia Pacific - Excluding Japan	12.60	6.34	9.07	28.01
Pacific Assets	Asia Pacific - Excluding Japan	2.18	7.55	17.28	27.01
Aberdeen Asian Smaller Companies	Asia Pacific - Excluding Japan	2.55	18.92	0.00	21.47
Aberdeen Asian Income	Asia Pacific - Excluding Japan	2.71	11.22	6.21	20.14
Scottish Mortgage	Global	18.00	0.00	0.00	18.00
Premier Energy & Water	Sector Specialist: Utilities	17.48	0.00	0.00	17.48
Utilico Emerging Markets	Global Emerging Markets	0.00	16.96	0.00	16.96

Source: AIC Monthly Information Release (31 December 2016)

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry - the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC's members believe that the industry is best served if it is united and speaks with one voice. The AIC's mission statement is to help Members add value for shareholders over the longer term. The AIC has 345 members and the industry has total assets of approximately £157 billion.
2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.