“I love China,” said Donald Trump once.
Well, do the DFMs we cover share his view?
You’d be forgiven for thinking the world’s second largest economy had somehow dropped off the face of the earth over the past couple of years, as the Chinese government grappled with how best to stimulate a (relative) slowdown in growth.
Both sentiment and valuations have been depressed for a while now, and since we’re into the second half of 2024 we thought we’d conduct a quick pulse check as to how allocators are feeling about the investment case for the Sleeping Giant.
Two DFMs we spoke to used the phrase ‘too big to ignore’ to describe the Asian nation. But both stopped short of investing in China through single-country funds and instead chose to gain exposure through either Asian or emerging market funds, which can look pretty similar depending on the mandate.
Something Asset Allocator covered a few months ago was to find out the precedence to China within the five most popular Asian equity funds on the database.
On average, China comprises 27 per cent of each fund, with Federated Hermes ex-Japan the largest with 43.5 per cent and Schroder Asian Income the lowest at 9.8 per cent.
The team at Abrdn pointed out the myriad structural challenges facing the state, including a lower trajectory of economic output, weaning itself off the excesses of the property market, and finding a balance between promoting a free market and stock exchange in a one-party autocracy.
To navigate these headwinds, they pointed to their use of the Artemis Smart Garp Global Emerging Markets Equity fund, which offers a more value-tilted strategy than many of its peers.
“We supported this strategy at launch and for a period the fund underperformed the index as the ‘BATs’ (Baidu, Alibaba, Tencent) captivated foreign investors' imaginations, dominated the weighting in the index and powered market returns resulting in elevated multiples which subsequently collapsed,” said Jason Day, senior investment manager on the Abrdn MPS.
“In contrast, Artemis with its value orientation, having avoided these types of companies, was able to ‘bottom fish’ selectively for what are in some cases good businesses with solid financials, strong domestic penetration and candidates for significant earnings revisions.”
Meanwhile John Husselbee, head of the Liontrust multi-asset team, said that while he does not yet allocate to China separately, this may change when there is sufficient choice of funds specifically excluding Chinese equities.
He said that while China is additionally hindered by real estate and ongoing governance challenges, the Chinese authorities are ‘hardly oblivious’ to the challenges and continue to try to restore confidence and reflate the economy, which can only be a good thing.
