Will China prosper in the Year of the Pig?

For Chinese New Year Rob Morgan considers the opportunities and risks of First State Greater China Growth Fund.

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  1. Rob Morgan

Farewell to the Year of the Dog as we welcome a Chinese New Year this week. 2018 was indeed something of a dog for China’s equity market with the local ‘A-Share’ index losing about a quarter of its value. This year is the Year of the Pig, traditionally a symbol of prosperity, and there is reason to believe it heralds a more positive outlook.

The potential for an escalating trade war between the US and China, and slowing economic growth in China, are investors' main concerns. The trade arguments do currently look as if they may be entering a more productive phase, with both sides in talks and wanting some kind of deal. However, as Martin Lau, manager of First State Greater China Growth fund points out, although progress towards an entente cordiale is encouraging, there remains a wide gulf between the two countries on a broad range of issues, which will take time to resolve.

The trade war exacerbates a Chinese economic slowdown that stems from the authorities’ focus on deleverage – reducing debt. This has impacted access to funding and has subsequently knocked business and consumer confidence. While Chinese growth in the region of 6% is the envy of most countries, there has been a slowdown in the rate of growth of consumption, particularly in larger durable goods such as cars.

This is worrying because policy makers are trying to direct the Chinese economy away from exports and more towards domestic consumption and self-reliance. However, underlying strength is indicated by broader retail sales still showing high single digit year-on-year growth. Stalling sales in big ticket items could be more to do with a dip in confidence caused by falling markets and the sense that house prices have peaked.

Mr Lau believes market volatility is set to continue over the short term. In response to trade war uncertainties and slowing growth, he expects the Chinese government to continue a targeted approach to bolster the economy, with policies designed to ease conditions for businesses and households, while maintaining an attack on debt reduction.

Over the longer term he is more confident. Mr Lau believes the growth story remains intact with Chinese companies focusing more on research & development and product innovation, in order to compete with global peers. Meanwhile, the structural trends of the consumption of higher value products and increasing healthcare spending should persist as incomes continue to rise. The growing middle class in China should in theory fuel considerable growth for years to come. The nation has around 380 million millennials who will likely have greater spending power than their parents.

Another reason for optimism is the Chinese government’s commitment to raising the quality of domestic markets. There is much to be done in terms of raising corporate government standards, but ongoing reforms should help bolster investor confidence and improve corporate profitability.

This fund held up well compared with its immediate peers over 2018, and Mr Lau has taken advantage of market weakness to add to existing high conviction holdings at lower prices. This included ENN Energy and electrical appliance manufacturer Midea Group. He expects to take advantage of plenty of interesting opportunities in companies that could benefit from longer-term trends.

Our view

This fund is managed using First State’s long-established and successful investment process looking for high quality, well managed companies that look after the interests of minority shareholders. There is a strong emphasis on long term investment decisions and capital preservation; though it is inevitably still a volatile area to invest and should only represent a small component of more adventurous portfolios.

We continue to admire the manager’s rigid focus on identifying strong companies with trustworthy management in a region where there are many pitfalls for investors. It remains part of our Foundation Fundlist.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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