It’s already been a tough start to the year for the Chinese market, as the Chinese New Year, the year of the monkey approaches on 8 February.  Monkeys in the Chinese zodiac are ‘clever, mischievous and curious’ so we’ll have to see if this brings about a luckier year for Chinese markets.

Certainly fund managers investing in China are proving sanguine. The Association of Investment Companies (AIC) has collated views from investment company managers on China and one thing ringing out loud and clear is that the spectacular growth story of the past should not cloud judgement on the China that we see today.  See page 2 for complete fund manager comments.

Dale Nicholls, Manager, Fidelity China Special Situations said that China “continues to grow at a better pace than the developed world and personal consumption is likely to outpace this rate of growth as the economy transitions towards a consumer-led market.”

Howard Wang, Manager, JPMorgan Chinese Investment Trust comments that, “It’s important for investors to acknowledge and be comfortable with China’s slower growth. Many secular growth opportunities with strong multi-year prospects still exist across Chinese equities, especially in the “new economy” sectors of healthcare, internet, consumption and environmental protection.”

Similarly, Ian Hargreaves, Manager, Invesco Asia, explains: “I have just returned from a research trip to China and found nothing to suggest that the economy is deteriorating at a more rapid rate than we have seen so far. Neither did I find any evidence of new factors undermining the resilience of the consumer and service sectors.”

Mark Mobius, Executive Chairman, Templeton Emerging Markets Group and Co-Manager of Templeton Emerging Markets Investment Trust said: “We are not terribly concerned about growth in China, nor its long-term investment prospects. We would dub current 2016 projections of about 6% in gross domestic product growth as quite strong…”

Ewan Markson-Brown, Manager, Pacific Horizon Investment Trust says that, “China is amidst its great transition from an investment led economy to a service led economy, with services growth accounting for 80-90% of recent GDP growth (Sept 15)…Currently the market is focusing on the losers of this transition…we expect in time, the market to turn back its attention to the long-term service oriented winners.”

 

Complete fund manager comments

Howard Wang, Manager, JPMorgan Chinese Investment Trust said: “We have long acknowledged the imbalances in China and the transition away from an industrial- and manufacturing- based “Old China” to a services- and consumption- driven “New China”. Near term sentiment will therefore remain volatile during this growth transition. While going through market corrections may not be a pleasant experience for investors, we do not believe the corrections are reflective of a wider deterioration in company fundamentals. It’s important for investors to acknowledge and be comfortable with China’s slower growth. Many secular growth opportunities with strong multi-year prospects still exist across Chinese equities, especially in the “new economy” sectors of healthcare, internet, consumption and environmental protection.”

Dale Nicholls, Manager, Fidelity China Special Situations said: “I remain positive about the prospects for China. I consider it to be a market with great potential brought down by macroeconomic concerns over the short term. I would agree that the pace of reforms in China has been disappointing and in some cases such as currency depreciation, the timing and communication could have been better. Having said this, China’s decision to move towards a more flexible currency is a long term positive. In my view there is potential room for positive surprises going forward, and this prevalent sentiment creates opportunities in areas such as A-shares, where I am finding some large-cap strong businesses at reasonable prices.

A significant change is underway in China; it continues to grow at a better pace than the developed world and personal consumption is likely to outpace this rate of growth as the economy transitions towards a consumer-led market. It is interesting to witness changes driven by increasing penetration of the internet, particularly as a vehicle to reach previously untapped markets. For instance, while traditional retail networks are still to establish a rural footprint in China, e-commerce has already ensured that both goods and services are now accessible to a wider rural and middle class audience. As people get wealthier, demand for better quality goods and services is also on the rise in areas such as health care and education. This is creating several opportunities for the fund.

I also think there are fewer reasons to worry about the Chinese property market considering overall affordability trends – recent interest rate cuts only help this and the Chinese consumer balance sheet is in good shape. However, I remain concerned about corporate balance sheets in China, where debt has grown substantially. I also remain cautious towards banks as I maintain that the full extent of their non-performing loans is not fully recognised.”

Ewan Markson-Brown the Manager of Pacific Horizon said: “China is amidst it’s great transition from an investment led economy to a service led economy, with services growth accounting for 80-90% of recent GDP growth (Sept 15), which is being driven by the Smartphone revolution which is allowing the online economy to boom. However, the cost of this technological disruption is severe, and is creating permanent relative price destruction within the industrial and commodity sectors of the Chinese and the world economy. Currently the market is focusing on the losers of this transition where the majority of the recent growth in Chinese debt has gone, we expect in time, the market to turn back its attention to the long-term service oriented winners.”

Mark Mobius, Executive Chairman, Templeton Emerging Markets Group and Co-Manager, Templeton Emerging Markets Investment Trust said: “We think the type of market volatility we have seen is likely to continue this year, and not only in China. Volatility is increasing in many markets and it’s something investors will likely need to learn to live with. We view periods of heightened volatility with the lens of potential investment opportunities—allowing us to pick up shares we feel have been unduly punished. In the case of China, the government’s efforts to maintain stability on the one hand and to allow a freer market on the other is a difficult balance to achieve.

“That said, we are not terribly concerned about growth in China, nor its long-term investment prospects. We would dub current 2016 projections of about 6% in gross domestic product growth as quite strong given that the size of the economy has grown tremendously in dollar terms from that of a few years ago, when growth rates were stronger but with a smaller base. This is an aspect we think many investors may be missing when they see growth slowing. The fundamentals in China are still excellent, in our view. It is one of the fastest-growing economies in the world even if the growth rate has decelerated.”

Ian Hargreaves, Manager, Invesco Asia, said:  “I have just returned from a research trip to China and found nothing to suggest that the economy is deteriorating at a more rapid rate than we have seen so far. Neither did I find any evidence of new factors undermining the resilience of the consumer and service sectors.

“Concerns over renminbi (RMB) depreciation have contributed to recent market weakness. Unfortunately, the Chinese government’s decision to change the RMB pricing regime so as to measure it against a trade-weighted basket – which we consider to be a sensible change – was poorly communicated allowing talk of declining FX reserves and capital flight to heighten investor risk-aversion. The People’s Bank of China has now issued clearer guidance, although we should be braced for several months of large declines in reserves as Chinese companies seek to repay unhedged foreign debt. Furthermore, I expect that the RMB market will gradually stabilise as China’s external position appears sound compared to many emerging market countries – foreign debt/GDP is low at 10%, while its trade surplus is currently 5% of GDP.

“Of greater concern is the level of domestic debt-to-GDP in China, which is high and continues to rise. However, I believe we are still some way from reaching the banking system’s liquidity limits. This is important as it should buy some time for the government to begin to deliver on its supply-side reform agenda, which many are sceptical about given the lack of progress in reducing overcapacity in recent years. Such scepticism may be too pessimistic as we are starting to see some positive developments, such as: moves by the government to prepare for the social consequences of capacity closures; acceptance that some companies will have to go under; and evidence of action in the worst affected sectors like steel, coal and cement. However, local governments have a leading role to play in this process and there is still no clear way for them to be incentivised. Furthermore, progress in reform will do nothing to aid growth in the near-term, although if the market believes action to be far-reaching enough then that could be positive for share price valuations. The challenge, as I have found with India in the last 18 months, will be judging what constitutes significant reform and what doesn’t.”

 

AIC members with largest percentage holdings in China (at 31 December 2015)

Company	AIC sector	China %	Hong Kong %	Taiwan %	Total %
Fidelity China Special Solutions	Country Specialist: Asia Pacific	77.19	17.86	2.65	97.70
JPMorgan Chinese	Country Specialist: Asia Pacific	68.00	14.00	14.00	96.00
JPMorgan Asian	Asia Pacific – Excluding Japan	34.00	11.00	14.00	59.00
Invesco Asia	Asia Pacific – Excluding Japan	23.40	20.03	10.71	54.14
Martin Currie Asia Unconstrained	Asia Pacific – Excluding Japan	42.42	0.00	5.97	48.39
Pacific Horizon	Asia Pacific – Excluding Japan	29.00	6.00	13.00	48.00
Schroder AsiaPacific	Asia Pacific – Excluding Japan	8.00	26.00	11.00	45.00
Asian Total Return	Asia Pacific – Excluding Japan	0.00	28.36	16.05	44.41
JPMorgan Global Emerging Markets Income	Global Emerging Markets	13.00	7.00	21.00	41.00
Henderson Far East Income	Asia Pacific – Excluding Japan	17.78	10.92	10.74	39.44
Fidelity Asian Values	Asia Pacific – Excluding Japan	16.60	8.80	13.30	38.70
Edinburgh Dragon	Asia Pacific – Excluding Japan	5.89	23.84	6.05	35.78
Scottish Oriental Smaller Companies	Asia Pacific – Excluding Japan	14.40	7.94	12.54	34.88
Schroder Oriental Income	Asia Pacific – Excluding Japan	3.00	19.00	11.00	33.00
Aberdeen New Dawn	Asia Pacific – Excluding Japan	5.01	22.19	5.60	32.80
Pacific Assets	Asia Pacific – Excluding Japan	3.38	10.13	17.78	31.29
Templeton Emerging Markets	Global Emerging Markets	23.80	0.00	6.30	30.10
Witan Pacific	Asia Pacific – Excluding Japan	12.34	12.21	4.67	29.22
Advance Developing Markets	Global Emerging Markets	17.00	4.00	8.00	29.00
JPMorgan Emerging Markets	Global Emerging Markets	7.00	9.00	8.00	24.00
Aberdeen Asian Income	Asia Pacific – Excluding Japan	4.28	11.92	5.06	21.26
Utilico Emerging Markets	Global Emerging Markets	0.45	20.76	0.00	21.21
Aberdeen Asian Smaller Companies	Asia Pacific – Excluding Japan	3.17	17.15	0.00	20.32

Source: AIC Monthly Information Release (MIR)