China tends to divide opinions, at least among investors.
In the last month alone, I’ve met a manager who loves it so much that they’re launching a dedicated China fund. But I’ve also met one who’s very underweight on the basis that it’s so unpredictable and the risks are just not worth taking.
So, who’s right? What moves stock markets in China? And is it actually a good investment?
The China bull run – what happened?
On 24 September, the People’s Bank of China (PBoC) announced a series of measures designed to stimulate the economy.
In the couple of weeks that followed, the market shot up by more than 25% (in sterling terms). However, it has since lost nearly half of that.
The measures announced ranged from cutting the reverse repo rate (think of this a bit like cutting interest rates), lowering mortgage rates, providing support to the housing market and supporting stock market development.
They were more generous than most investors had expected, hence the rally in the equity market afterwards as investors grew hopeful that this was the start of better times for China. And there’s reason to be hopeful.
China is one of the world’s largest economies, and home to many of the leading companies in innovative areas like eCommerce (such as Alibaba, China’s answer to Amazon) and electric cars (BYD, a Chinese car company, sold nearly twice as many electric vehicles as Tesla in January to May 2024).
The market has now come off substantially since its peak, but why?
It seems that a lot of the initial rally was less due to investors increasing their positions in Chinese stocks and more about hedge funds unwinding short trades.
Hedge funds can sell short when they dislike something so much, and are so convinced it’s going to go down in price, that they literally sell what they don’t own. They’re investing, or shorting, in the hope that they can later buy it back at a lower price to cover their position.
While the rally might have been less about outright enthusiasm and more about people covering their backs, the market is still trading above where it was before the measures were announced.
What’s next for Chinese investors?
Most investors have cautiously welcomed the stimulus package, but we’re yet to see what impact they will have on the economy.
In the long term it’s the latter that drives markets.
China is likely to remain a volatile market. Economic data is not always as transparent as it is in the west and the stock market itself is somewhat less mature.
The potential for growth is huge, however, and the range of companies increasingly exciting.
So, will the Chinese stock market be a good investment going forward?
Our crystal ball has gone somewhat cloudy on this question.
Investing in China will certainly help you diversify an investment portfolio, but the fact is there are still lots of questions to be answered.
So, if you want to invest in the region, we’d recommend exercising caution. Perhaps make it a small part of your portfolio or invest in a fund which includes China among other countries. That way a manager can do the legwork of deciding which countries to invest in and when for you.
Here are some ideas to get you started.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
This article isn’t advice. All investments can rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.
FSSA Greater China Growth
Managed by the experienced Martin Lau, this fund focuses on the greater China region.
The manager looks for companies with a competitive advantage that others struggle to replicate. This is something like a well-known brand or the ability to raise prices for their products, without affecting demand from customers.
The fund has performed well over the long term, and has done better than its peers in the region over most time frames. It’s struggled to beat its benchmark in the shorter term though.
The fund can invest in emerging markets and smaller companies, which can increase risk. As it’s focused on a single region, it should only ever make up a small amount of a portfolio.
Annual percentage growth
30/09/2019 To 30/09/2020 | 30/09/2020 To 30/09/2021 | 30/09/2021 To 30/09/2022 | 30/09/2022 To 30/09/2023 | 30/09/2023 To 30/09/2024 | |
|---|---|---|---|---|---|
FSSA Greater China Growth B Acc GBP | 21.50 | 12.98 | -16.29 | -4.30 | 8.14 |
IA China\Greater China TR | 26.53 | 1.54 | -19.78 | -10.83 | 5.52 |
MSCI Golden Dragon TR USD | 22.54 | 1.18 | -18.32 | -0.18 | 19.89 |
Schroder Asian Alpha Plus
If you want to invest in China without the sharper market ups and downs of a single country fund, you could consider a broader Asian fund.
The Schroder Asian Alpha Plus fund invests across Asia (but not Japan).
At the end of July, it had 18.8% invested in China with a further 19.2% in Taiwan and 13.5% in Hong Kong. It also has allocations to India, Korea, Singapore and a few other countries, including some emerging market economies. Remember though, investing in emerging markets can increase risk.
The manager, Richard Sennitt, has an extensive track record of investing in Asia and aims to spot companies with exciting potential before they’re noticed by other investors.
The fund can invest in smaller companies and derivatives, which can increase risk. As it’s focused on a single region, it should only ever make up a small amount of a portfolio.
30/09/2019 To 30/09/2020 | 30/09/2020 To 30/09/2021 | 30/09/2021 To 30/09/2022 | 30/09/2022 To 30/09/2023 | 30/09/2023 To 30/09/2024 | |
|---|---|---|---|---|---|
Schroder Asian Alpha Plus Fund Class L Acc GBP | 20.23 | 12.94 | -12.07 | 1.14 | 14.10 |
IA Asia Pacific Excluding Japan TR | 8.26 | 15.31 | -10.69 | 0.34 | 14.25 |
MSCI AC Asia ex Japan TR USD | 12.63 | 10.00 | -13.61 | 1.78 | 17.74 |
iShares Emerging Markets Equity Index
If you’d prefer to get some general exposure to emerging markets which will include China, but also other high growth economies, you could consider an emerging markets equity index tracker fund.
China currently makes up just under a third of the iShares Emerging Markets Equity Index fund, the biggest country exposure.
However, the fund invests in a broad spread of companies based across emerging countries, including, India, Brazil, South Africa and Taiwan as well as China.
Sector wise, it invests in companies like TSMC, the world’s largest semiconductor manufacturer and HDFC, one of India’s leading private banks. Though some smaller companies also feature which can add risk.
So far this year, the fund has returned 13.20%, which was slightly behind the benchmark.
As a tracker fund, it simply aims to track the performance of the broader emerging stock market, rather than try to outperform it.
It’s one of the lowest-cost options to invest in emerging markets and could help boost long-term growth potential – with some volatility along the way though.
30/09/2019 To 30/09/2020 | 30/09/2020 To 30/09/2021 | 30/09/2021 To 30/09/2022 | 30/09/2022 To 30/09/2023 | 30/09/2023 To 30/09/2024 | |
|---|---|---|---|---|---|
iShares Emerging Markets Equity Index (UK) Acc GBP | 3.93 | 13.28 | -8.33 | -0.27 | 15.82 |