‘When China sneezes, the world catches a cold’ is not an investment adage we’re all familiar with, but it certainly appears to be the case at the moment. What of this Black Monday sneeze? Do we brace ourselves for a global contagion as ferocious and sudden as the Spanish flu pandemic of 1918? I’m not sure.
I certainly hope Australia made hay whilst the Chinese commodity sun shone, but for the rest of us a deep breath of steaming menthol vapours and a good dose of perspective should undoubtedly prove the appropriate tonic.
Most investors will have been familiar with the compelling thematic stories about China for many years: population growth, urbanisation, infrastructure growth, etc. The difficulty with China has often been how to play these amorphous themes and convert them into a portfolio outcome.
In 1992 there was only one China-specific mutual fund–HSBC GIF Chinese Equity–available to European investors in what we now call the UCITs structure. This was followed in November 1993 by the launch of the Allianz China Fund. Until 2011 all the China funds available in the market were equity funds. Today, there are nearly 100 UCITs funds with a China focus (and considerably more share classes) available in Europe. They cover not only equities; funds can be found specialising in emerging-market bond, mixed-asset, currency, and money market sector classifications.
If we accept that mutual fund production reflects investor sentiment, we can illustrate the successful pervasion of the China story. In 2015 up to June we saw 13 new major China fund launches in Europe, although it will be interesting to see how many funds are launched in the second half of the year.
Indeed, nearly 50 per cent of all the China-themed Ucits vehicles have been launched since 2010, with total assets under management for all of these funds increasing from €19bn (£14bn) in 2010 to some €28bn today–an increase of 47 per cent. But as a whole, these figures represent a very small proportion of the overall UCITs market.
The variation of returns among China-themed funds during the Black Monday event was considerable and almost exclusively negative – only two funds returned a positive figure for the seven-day period ending 27 August 2015, namely the Prescient China Conservative E [Hedged] USD, up 1.62 per cent, and Amundi Eureka Cina 2015, up 0.29 per cent.
Casualties at the other end saw losses over the same period of up to 18.2 per cent. Some big name losers over the period included AllianzGI’s China A-Shares, which fell 13.8 per cent; BNP Paribas Investment Partners’ Flexi I CSI 300 Index, which lost 15.5 per cent; and KBC Horizon China, returning -17.3 per cent. The overall average return during this seven-day period was -5 per cent.
It is an unusual practice and possibly unwise to spend too much time examining such short-term performance–especially in collective investment vehicles, but the overall volatility of some of these examples was breathtaking in isolation.
Let’s not forget, though, that over that same short period the Investment Association UK All Companies sector, for example, also returned -5 per cent – a figure comparable to the average return of the China funds. Consider also some longer-term performance. Taking the one-year period to 27 August, there were some fairly impressive returns even with the Black Monday correction. KBC Horizon China, so maligned in our seven-day analysis, returned 57 per cent over this period; Allianz China A-Shares (USD) returned 69 per cent; and the average of all the funds was a fairly robust 10 per cent.
What then to make of the China correction? Is it likely there was an element of profit taking that drove this volatility? Most certainly. Equity markets are reasonably efficient and the bad news from China wasn’t a total surprise – high debt, property travails and contracting demand would have long been factored into prices. Certainly the speed of the currency devaluations was unnerving, but isn’t that the nature of currency markets more generally?
There is no denying that Black Monday was a bad day and the Earth is still wobbling slightly about its axis, but all the fund managers I have met since have been characterised by one thing–a sense of calm. Where is the mass panic? Perhaps “Profit taking after some healthy returns” or “Active fund manager opportunities increase after shake out” are not calamitous-sounding enough headlines in our 24-hour newsfeed world.
There are certainly some serious investor ramifications that have come about as the China malaise has become more overt. The big push China has been making with the RQFII initiatives implemented in 2011 was probably just on the verge of getting some considerable traction for the A-shares market. This may well now be compromised as institutional investors have a re-think. If A-shares were considered generally cheap a month ago, they’re bargain basement now. The fortunes of some recently launched MSCI China A ETFs will provide an interesting barometer here, even if some of the longer-term positive fundamentals in China are still in place.
China has sneezed. It was nasty and it was messy because China has become a more sophisticated and investible market, and we as investors have learned more about its global importance. Was it contagious? Not in the way a US sneeze invariably is.
Key takeaway: China funds have grown in popularity in recent years, but the recent falls have hit the market hard. Short-term performance was negative for all but two funds over the week of Black Monday, but that has not wiped out the year’s gains entirely.
Jake Moeller is head of UK & Ireland research at Thomson Reuters Lipper.