Harvey Jones
28.01.2022
Dare you grab the Chinese tiger by its tail?
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As China celebrates the Year of the Tiger many investors will be wondering whether the country’s stock market has lost its roar.
Chinese GDP may have grown a better-than-expected 8.1% in 2021, but share prices crashed 21.64%, as measured by MSCI.
That was in market contrast to that US, where stocks ended the year a staggering 26.95% higher.
This isn’t a one off. China has underperformed for years, delivering an average return of 7.38% a year over the last decade. That looks solid enough but is far behind the impressive average annual US gain of 16.64%.
That kind of difference adds up over time. If you had invested $100,000 in the iShares MSCI China ETF a decade years ago, you would have $188,600 today. By contrast, the US-focused Vanguard S&P 500 ETF would have turned the same sum into $460,930.
China is playing catch up with the US in many ways but when it comes to the stock market there is only one victor.
Investing is cyclical and last year's loser can quickly become this year's winner, and vice versa. So is now the right time to catch the tiger by its tail?
China faces age old threat
The rise of China is the greatest economic and political story of the Millennium. In 2000 it was the sixth biggest economy on the planet, now it’s in second place with GDP totalling $18 trillion, edging closer to the US at $21.5 trillion.
However, China’s GDP per capita is less impressive at around $11,000, against almost $65,000 in the US.
China is ageing at an even faster rate than the west, as its birth rate goes into sharp decline despite scrapping its one-child policy in 2015.
Instead of triggering a baby boom, the country's total fertility rate has fallen further to just 1.3 per women, below the 2.1 required to maintain population levels, and the new three-child policy seems unlikely to reverse that trend.
China is in danger of growing old before it grows rich – or makes investors rich.
Tech crackdown spreads the pain
Premier Xi Jinping’s crackdown on the booming tech sector is one reason for last year’s disastrous stock market performance.
Regulators pulled the plug on Alibaba tech entrepreneur billionaire Jack Ma’s $37 billion flotation of Ant Group in November 2020, and ecommerce giants Alibaba and Tencent have lost an estimated US$1 trillion in market capitalisation since.
This has hit Western investors hard, as the tech giants made up a large part of many investment fund holdings.
The Chinese property sector is also crumbling, as the second largest developer Evergrande Group faces collapse with debts of $300 billion.
Nicholas Yeo, co-manager of the Abrdn China Investment Company, says: “China’s zero-tolerance approach to COVID is disrupting economic activities and weighing on consumption.”
China can afford to play it easy
China may not have delivered the excitement investors were hoping for when the world went mad over the BRICs in the early part of the millennium.
Yet it does have one big advantage, Yeo says. "The authorities retain plenty of headroom to provide policy support. Recently they cut interest rates and accelerated approvals for infrastructure projects, which will go some way to bolstering investor confidence.”
This could give it an edge over the US, where the Federal Reserve may be forced to hike interest rates four or five times this year to rein in inflation, which could slow growth and collapse the lengthy tech boom.
There is a wide divergence in monetary policy in China compared to the US and Europe, says Dale Nicholls, portfolio manager of Fidelity China Special Situations. “China is at a different stage in the cycle with an easing bias, which history shows often supports markets. It has more levers to pull to encourage growth.”
A different way to play China
In ancient folklore, the tiger has “strength, determination and sagaciousness” and China will need all of those qualities to face down the challenges it faces today, says Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust.
2021 was “quite chaotic”, with a host of disruptive policy initiatives, but now the Government is seeking to promote stability.
China also boasts market leadership in many industries including renewable energy and electric batteries, Sehgal adds. “It is also working resolutely to achieve independence in other technology areas such as semi-conductors and even software, too.”
International investors can tap into the China growth story without investing in the country itself, for example, French luxury goods maker Louis Vuitton Moet Hennessy (LVMH) generates a large chunk of its profits from Chinese consumers, as does London-listed alcohol and spirits group Diageo, owner of brands like Johnnie Walker, Smirnoff, Baileys and Guinness.
FTSE 100-listed bank HSBC and insurer Prudential are now primarily focused on China and Asia.
Put a tiger in your tank
Despite 2021's meltdown, investors in China can’t complain too much. They enjoyed returns of 25.5% in 2020 and 18.69% in 2019, and although equities dipped in 2018, growth in 2017 was a staggering 40.73%, measured by MSCI.
China still offers plenty of opportunities, with an aspiring middle class and strong demand for premium goods and services, says Pruksa Iamthongthong, co-manager of the Asia Dragon Trust. "Beijing is focused on improving productivity, lowering costs, fostering innovation and propelling growth.”
As you would expect, there is a wide choice of China-focused exchange traded funds (ETFs) to choose from.
These range from generalist funds, such as iShares MSCI China and the Xtrackers MSCI All China Equity Fund, to specialist options such as the Global X range of funds covering sectors, whose numbers include Global X MSCI China Energy, Utilities, Materials, Industrials, Financials and Health Care.
Other popular ETF options include iShares MSCI China Small-Cap ETF and the KraneShares CSI China Internet ETF.
Every serious investor will want some exposure to China, and now could be a good time to top yours up, with the market still down after a tough year. Don't expect the tiger to spring instantly back to life, though.
Rebecca Jiang, co-portfolio manager of the JPMorgan China Growth and Income Investment Trust, says the investment case for China is strong but cautions: “It is more important than ever for investors to take a long-term view.”
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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