China represents one of the more interesting opportunities for investors this year, following a resurgence in its economy, investment platform Willis Owen said this morning as the company's head of personal investing revealed his top three China-related funds for the Chinese new year.
The country has been at the centre of the pandemic since the beginning of last year, having been impacted by coronavirus first, but after a severe lockdown, its economy was also among the first to come out of lockdown and get back to growth mode.
China's economy grew at just 2.3% in 2020 (the lowest rate since 1976), but while this is a far cry from the 6-7% levels we have seen in recent years, the fact China saw GDP growth at all in 2020 is impressive. In the last quarter of 2020 the country saw growth of 6.5%, more in keeping with the long term trend, and leaving its economy well poised for 2021.
Chinese new year always represents a chance for investors to review their allocations to the country, and this year is no exception. There are a number of positives now in its favour, including the way it dealt with the pandemic, but also changes in its standing both domestically and internationally."
Now, as China enters the year of the Ox - signifying strength and reliability, among other things - Adrian Lowcock, head of personal investing at Willis Owen, believes there are a number of positives in play for investors.
"Chinese New Year always represents a chance for investors to review their allocations to the country, and this year is no exception," he said.
"There are a number of positives now in its favour, including the way it dealt with the pandemic, but also changes in its standing both domestically and internationally.
"Economies don't always match stock markets, but a lot of factors have the potential to align this year to boost returns."
Below Lowcock identifies some of the key factors behind China's recovery, as well as looking at three funds investors can consider to gain exposure to the region.
China benefited from being the first into the crisis and the first to come out of it. The country has reopened it's economy and small, localised outbreaks of COVID-19 have been dealt with swiftly and will have little impact on the overall economic growth of the country. The re-opening of the economy early means that China is well placed to gain market share in exports, a key driver of GDP growth.
Money tightening unlikely
As China reopened the economy it also introduced some modest stimulus - Investment in public infrastructure, a popular tool for stimulus, rose 0.9% year-on-year in 2020. The low level of stimulus required is a reflection of the speed of the recovery in the economy and the fact the Chinese government is focused on de-risking its financial system.
This cautious approach means there is less likely to be a need for significantly tighter monetary policy later this year.
As with other regions, the pandemic saw an increase in online services such as shopping, entertainment and education. It has helped accelerate structural trends including the rise of local brands, business innovation driven by technology and upgrading to premium products.
US trade tensions ease
There should be an improvement in relations between the US and China. President Biden is likely to take a less confrontational and more diplomatic approach, and whilst the issues between the two sides will remain, a less combative approach from the US gives the opportunity for China to decide what relationship it wants with the US. Tensions will remain, but the threat of trade wars has diminished.
China shifted focus to concentrate on greater ‘self-sufficiency' in recent years and this is starting to be reflected in different areas. For example, last year was the 9th consecutive year in which services and consumption was a larger contributor to GDP than manufacturing and construction. A rebalance to a domestic demand-driven economy offers investors opportunities. Consumer spending is improving and likely to continue as vaccines are rolled out. The consumer is also becoming more affluent and educated and has become more confident in their own country's products. They are demonstrating a preference for domestic brands.
On top of this, the country is now seen as a technology innovator and leader in strategic industries such as aerospace, IT, semiconductors, robotics and will provide some attractive opportunities for investors as ‘national champions' begin to emerge.
Three investment funds ideas
Fidelity China Focus - Manager Jing Ning adopts a benchmark-aware approach with a clear value tilt.
She focuses on companies that have been disregarded by the market due to economic or company-specific reasons, but have the potential to turnaround over the long run.
Ning has demonstrated her ability to add value in Chinese equities over the longer term whilst sticking to her value approach.
FSSA Greater China Growth - Martin Lau has proved to be an expert investor by delivering impressive returns across his Asian and Greater China equity mandates.
The team steadily applies a tried-and-tested bottom-up stock-selection process to look for quality companies that deliver sustainable growth at attractive valuations. The trademarks of the team's process are its absolute return focus, low portfolio turnover, and benchmark-agnostic mentality.
This fund is a relatively concentrated portfolio of 55-60 names across the market cap.
MI Somerset Global Emerging Markets - Edward Robertson, is one of the co-founders of emerging markets specialist boutique Somerset. Robertson employs a style which focuses on quality companies with healthy balance sheets, high returns on equity, strong cash flow and sustainable margins. He is prepared to pay a higher price for these defensive characteristics and believes profits and earnings should prove resilient in an economic slowdown.
This approach means the fund is likely to perform well in testing conditions, but may lag behind during momentum driven rallies led by companies that do not meet the fund's strict investment criteria.
The fund currently has around 23% invested in China and nearly 8% in Taiwan, and is a solid option for investors taking a first step into the region.