Page 32 - DIY Investor Magazine - Issue 25

CHINA INVESTMENT TRUSTS COME OF AGE
The Chinese stock market has been one of 2020’s top performers; up 19%, it’s well ahead of the US’s 10% gain and the UK’s sickly 19% drop.
But in the past, investing in China has been both difficult and disappointing; MSCI China index is up just 2.5% a year since 1993, miles behind the 8% a year posted by global markets.
Chinese stocks fell throughout the 1990s, while the rest of the world boomed; they were then flat before soaring just before the financial crisis. Up 83% in 2006 and 66% in 2007, they crashed the next year and trailed the rest of the world in the early 2010s as financial companies dominated the Chinese index.
THE RISE OF CHINESE TECH
But much has changed; financials account for under 14% of MSCI China and both Alibaba (20%) and Tencent (14%) are now larger than the entire Chinese financial sector.
Other large tech stocks in the top 10 include Meituan Dianping (a local food shopping platform), JD.com (online retail), NetEase (computer games), and Baidu (search engine).
Over five years, the Chinese stock market is up 14% a
year versus the world’s 11% and the US 15%; 16 Chinese companies are valued at more than $100 billion - the UK has four (Unilever, AstraZeneca, BHP and GlaxoSmithKline).
MAY YOU INVEST IN INTERESTING TIMES
China’s poor stock market returns occurred when its economy was growing rapidly. In Y2K China’s GDP was 25% of Japan’s and 10% of the US; by 2010 China’s exceeded Japan’s, becoming the world’s second-largest economy with 40% of US GDP.
In 2019, China’s GDP was 66% of the US and it looks set to overtake it by 2030
WHERE CHINA FITS INTO WORLD MARKETS
There are complications for investors wanting to invest in China; developed world global trackers typically have no significant exposure to Chinese stocks as it is not classed as a developed market.
Whole world trackers, like Vanguard’s All-World ETF, do include China but the country’s weighting is 5%, far below the 15% or so of world GDP that the country represents; ‘Greater China’ (including Hong Kong and Taiwan) still only takes it to around 7.5%.
Investors seeking exposure can include an emerging market tracker as China makes up around 45% of most emerging market indices, dominating emerging markets in the way the US dominates developed markets.
Presumably, China will one day be classed as a developed market; MSCI has no precise definition of what constitutes a developed market and moves between emerging and developed are relatively rare
GETTING CHINA EXPOSURE VIA TRUSTS
There are various ways to invest in China using an investment trust.
Mainstream global trusts typically have 5-10% in Greater China, similar to whole world trackers; Scottish Mortgage is the outlier with 20%.
Emerging market trusts have mixed exposure, with Fundsmith Emerging Equities at the low end (20%) and JPMorgan Emerging at the high end (50%).
Various Asia Pacific trusts with additional focus on income or smaller companies, have a similarly wide range of exposure to Greater China; Tech and biotech/healthcare trusts, two popular growth themes, are light on Chinese stocks, holding just a few per cent.
The two purely Chinese focused trusts are large; Fidelity China Special Situations (FCSS) has a market cap of £1.6 billion while JPMorgan China Growth & Income (JCGI) is nearly £400m.
DIY Investor Magazine | Sept 2020 32