China Growth Slows but Funds Still Perform

Economic growth in China has fallen to its lowest level in 27 years, but there are reasons to be optimistic about investing in the region

Holly Black 15 July, 2019 | 12:59PM

china skyscrapers

Fears of a slowdown in China are doing little to dent the performance of funds focused on the region.

China has reported its lowest economic growth for 27 years, with growth of 6.2% in the second quarter of the year.

The data suggests that the ongoing trade war between the US and China is taking its toll on growth. But both the UK and Chinese stock markets have been unaffected by the figures, as many investors expect the Chinese government to use monetary stimulus to provide a boost. Earlier this year, its government revealed tax cuts worth almost $300 billion in a bid to boost spending.

Experts also point out there are still several positives, such as an increasingly wealthy population driving up consumption of domestic goods – retail sales, for example, were up 9.8% year-on-year in the region. There are also hopes that talks between the US and China will lead to an easing of the trade tariffs which have hurt exports in recent months.

However, Fahad Kamal, chief market strategist at Kleinwort Hambros, warns that there is unlikely to be a quick resolution. “While trade tensions have undeniably contributed to a global economic slowdown – particularly in manufacturing – services have so far remained relatively resilient due to robust domestic consumer markets, which in turn are being supported by lower unemployment and higher wages in the developed world, and by tax cuts in China. Indeed, it is likely the Chinese authorities will increase stimulus measures to mitigate the impact of US tariffs.”

China Funds Post Strong Returns

China’s growth has been declining gradually for a number of years, having hit 14.2% in 2007. It is feared that a slowing of the economic powerhouse could have a knock-on effect across the globe, particularly if the country’s consumption of commodities falls as a result. This could impact upon FTSE mining firms, which export to the region, as well as automotive companies. Chinese imports fell by 7.3% in the first half of the year.  

Adrian Lowcock, head of personal investing at Willis Owen, adds: “The weaker economic data still shows an economy growing above 6% a year. China is slowing but it still looks manageable and investors can get access to fast-growing companies at valuations that are currently cheaper than they were earlier this year.”

A number of China-focused funds have delivered strong returns in recent years. The Silver-rated Fidelity China Focus fund has returned 123.9% over the past five years, and Bronze-rated Janus Henderson China Opportunities 112.1%.

The Fidelity fund has a value approach to investing, focusing on finding out-of-favour names with turnaround potential. Morningstar analysts say Jing Ning, manager of the fund, is a “savvy investor who consistently impresses us with her deep knowledge in Chinese equities”.

Almost 30% of the fund’s holdings are in financial services firms such as China Merchants Bank and China Life Insurance. It also holds telecoms company China Mobile and internet giants Tencent and Alibaba.

The Bronze-rated T. Rowe Price Asian ex-Japan fund, meanwhile, has 39.6% of its assets in Chinese equities including Tencent, Alibaba and insurance company AIA Group. It has returned 73.4% over five years. Manager Anh Lu looks for industry leaders with strong earnings prospect and the ability to expand. Morningstar analysts say she is “well-regarded and supported by deep analyst resources”.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Fidelity China Focus Y-Acc-USD20.25 USD1.11
Janus Henderson China Opps A Acc1,419.07 GBP0.71
T. Rowe Price Asian ex-Japan Eq Q USD13.04 USD1.08

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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