Before lunar new year festivities rang in this week, January fund returns were already more prosperous than the whole of last year with the top fund, UBS Equity SICAV – All China (USD) P Accumulation, returning 12.1%.
According to FE Analytics, the average return for the asset classes within the FCA Recognised universe for January was 5.2% and 4.8% within the Offshore Mutual universe.
This is in comparison to the year to 31 December 2018 performance which saw China equity funds within the FCA Recognised universe lose 16.95% and lose 18% within the Offshore Mutual universe.
However, fund flows within the asset class remained strong throughout 2018. According to Morningstar data, China equity fund flows for funds domiciled in either Ireland or Luxembourg during 2018 totalled €3.5bn. August was the only month that experienced outflows of €56.9m.
“As valuations have come down and expectations have been reset, 2019 could be a year of recovery for the consumer and technology sectors.”
China A-share fund flows did not experience any outflows last year and flows totalled €2.1bn by the end of 2018.
Beyond the pig year
Looking over a longer time horizon, it’s clear that patience is needed with Chinese equities. The top fund, Parvest Equity China A-shares Classic Cap, made a return of 105.6% over the three years to 31 January 2019.
This fund was followed by Investec All China Equity I at 72.5%, Pictet China Index I at 71.7%, UBS Equity China Opportunity P Accumulation at 69.4%, and Aberdeen Global China A-share Equity I at 63.6%.
Over the same period, the average return for the FCA Recognised universe was 51.7% and 39.9% within the Offshore Mutual universe.
According to its factsheet, the Parvest fund has its largest sector allocation towards finance (29%), followed by industrials (13.4%), consumer staples (13.3%), consumer discretionary (11.1%), and real estate (10.3%).
Top five China equity funds performance three years to 31 January 2019
Source: FE Analytics
Solid economic fundamentals
Liontrust’s head of Asia Income, Mark Williams, cited unstable geopolitics, led by the China-US trade dispute, as a chief reason for last year’s poor performance. But as Washington and Beijing inch towards some sort of resolution he said he was more optimistic about the Year of the Pig.
“We think the headwinds seen in 2018 should start to soften as US monetary tightening slows down, giving less impetus for further rises in the dollar,” Williams said.
China’s economic growth fell to its slowest annual rate in almost three decades last year (6.6%) as the trade war and Beijing’s efforts to clamp down on corporate debt took their toll.
T.Rowe Price portfolio manager, Eric Moffett, said while China’s economy had decelerated from double-digit growth it was still solid from a global standpoint.
Moffett noted that what mattered most for many domestic stocks was not so much the national gross domestic product (GDP) but the GDP growth of households.
“Data shows disposable household income has increased significantly over the past 10 years, despite the slowing economy. There are two reasons for this: demographics and policy,” he said.
“The pool of working age people in China has been stagnant for some years – but spending by this group continues to grow. On the policy side, the government has made a priority of delivering meaningful wage increases every year over the past decade, across every province in China.”
Moffett said that income growth had improved affordability for working-class families for consumables including holidays, insurance, healthcare, and medical services.
This year, Williams said his top stock picks were BOC Aviation, China Communication Services, Xinyi Glass, China Mobile, and Lee and Man Paper Manufacturing.
Gam Investments’ portfolio manager, Jian Shi Cortesi, said she favoured consumer and technology stocks as they were poised to benefit most from the country’s transition towards a consumption and technology driven economy.
“Both consumer and technology faced a lot of headwinds in 2018 and the sectors performed poorly,” she said.
“As valuations have come down and expectations have been reset, 2019 could be a year of recovery for the consumer and technology] sectors. In my view, it could be a good time to start bottom fishing for stocks, particularly in the internet space and automobile industry.”
Trade war risks
Ardevroa Asset Management’s co-founder, Jeremy Lang, said while China’s growth was well above developed economies it’s chief challenge of how to break of the ‘middle-income trap’ as rising wages threaten to undermine the country’s competitive edge in exports.
The US-China trade dispute escalated last year over Beijing’s efforts to transition its economy away from low-cost manufacturing.
“The US wants China to consume more American goods, while China wants to compete with the US by moving into tech-led value-added industries,” Lang said. “The result is a trade war.”
“For 20 years, China has been viewed as an opportunity. Now it is viewed as a competitive threat. This is a fundamental shift.”
Lombard Odier Private Bank chief investment officer Stéphane Monier said the US-China trade dispute could escalate this year before an eventual compromise is found as both sides stand to lose out from a prolonged dispute. “The probability of some form of agreement has increased,” he said.
On the currency side, Monier said his renminbi outlook was short term neutral and that any sign of a lasting trade war solution would lead to substantial strength.
The Chinese currency strengthened 2.7% against the dollar over the last three months to February 6 on the back of a weakening greenback and positive signals from China-US trade talks.
“The renminbi’s recent rally was more a reflection of the US dollar weakness,” Monier said. “China continues to keep the renminbi trading within a stable range against its official benchmark of currencies,” he said.
“Overall, relations between China and the US are being painted as antagonistic. But the global economy depends on their cooperation and mutual understanding.
“In the meantime, Chinese technology firms are investing in a China-focused market that is independent of longer-standing businesses in the US and Europe.”
The top funds were found using FE Analytics that were domiciled in either Ireland or Luxembourg, within the FCA Recognised or Offshore Mutual universes, and available for sale in at least three continental European countries.