An OECD report shows that the recovery is arriving sooner than expected and China is leading the way. However, concern is growing that the market may have come too far too soon.
The recovery is arriving quicker than expected, most notably in China. At least, that is what the Organisation for Economic Cooperation and Development (OECD) concluded in its latest interim assessment published last week.
China’s GDP is estimated to have risen by an annual rate of over 14% in the second quarter. Activity continues to pick up, the OECD report says, and is supported by the substantial fiscal stimulus and rapid increases in bank lending.
The positive macroeconomic news has fuelled investors’ hopes that equities will rally too, despite China’s notoriously volatile stockmarket. So have investors rushed into Chinese equities as they were hoping to profit from the economic rebound?
“Investors are trying to clutch on to any positive news. And there is positive news from China,” says David Wynn, the investment director at Bentley Jennison Financial Management.
Darius McDermott, the managing director of Chelsea Financial Services, also noticed an increased interest in China over the past couple of months. Yet he admits that some of his clients are “a bit trendy”. Inflows were not enormous but a lot of his clients hold China anyway.
Investors seeking exposure to China should adopt a long-term strategy and choose one or two premium managers, McDermott recommends. The choice for funds investing in China is greater than ever, he says. But the First State China Growth fund, with its slightly wider mandate, has always been his top choice. Gartmore’s China Opportunities fund is also on his buy-list.
Those investors with a shorter investment horizon, McDermott says, need to have the courage to sell out, even when they assume that the market can still go up. Wynn says his clients focus on capital preservation rather than appreciation. This became even more obvious after the financial crisis.
While his clients are of the opinion that China will be the driver of global growth, they will only allocate a small proportion of their portfolio to the country. Wynn gets the exposure to China from global equity managers. “We wouldn’t be comfortable with more than 7% as part of a portfolio that has 15% to 20% in emerging markets.”
However, he says that when his clients can afford to take risk, they will choose emerging markets rather than the west.
Hilary Coghill, the chief investment officer at City Asset Management, says that her clients became interested in China when markets were up.
Coghill accesses China through the Veritas Asia fund, which has got a relatively high weighting in China, and Martin Currie’s China hedge fund, which has about 60% invested in smaller private companies. “The view of the fund manager is that a large number of big quoted companies are under state influence,” she says.
Last year, Coghill says, may investors piled into commodity funds to benefit from China’s growth. However, interest in those funds has subsided.
Sam Sibley, the portfolio manager at Beckett Financial Services, does not hold any specific China funds. “It’s something that we have considered in the past and that we may do in the future but now we prefer a broader Asia fund,” she says.
At the time of the last rebalancing of the AFI portfolio in May, Sibley played it safe. A combination of an Asian fund, the Martin Currie Asia Pacific, an emerging markets fund, the JPM Emerging markets, and the M&G Global Basics fund, that has got some exposure to China, provided her a better risk/reward ratio.
These funds gave her exposure to China themes, she says, which include the demand for commodities, infrastructure, the emergence of a middle class, and being the engine for growth in the east but with lower volatility.
As in all emerging markets, Coghill says, fund managers are having difficulties finding companies they can invest in. “Another problem is that the market is very much driven by sentiment,” she says.
McDermott says regardless of how attractive the Chinese market looks, it always bears liquidity, political and currency risks.
Coghill says while there is no doubt that there will be interest in China in the long-term, the market has come too far too fast.
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