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Bulls in the China shop

Tom Stevenson

Tom Stevenson - Investment Director

Investors in the UK and America may be happy about the performance of their domestic markets so far this year but the rallies in London and New York are feeble by comparison with a soaraway Chinese stock market in January and February.

Bulls in the China shop

The CSI 300 index, which tracks shares traded in Shanghai and Shenzhen, has risen by 25% so far in 2019, reversing much of last year’s dismal Chinese stock market performance.  That’s more than twice as good as Wall Street has managed and more than three times better than London’s gain.

So, what’s driving China higher and can the rally continue?

The good news for investors in Shanghai and Shenzhen is that a combination of favourable influences is acting on the Chinese market at the same time.

The first is the prospect of a resolution of the trade tensions between China and the US. Although there remain plenty of areas of disagreement between the two countries there is also a shared desire on both sides to come to a deal.

A trade war is not in the interests of either economy and the impact of the early skirmishes is already showing up in slower Chinese GDP growth and in a weaker outlook for US companies. With an election little more than 18 months away in America, President Trump can ill afford to be blamed for job losses in his blue-collar heartlands.

President Xi may look to be in a stronger position, with no elections to win, but the Chinese Communist Party also rules with the consent of the Chinese people. He needs to keep the country on its path towards greater prosperity.

The second positive influence on Chinese shares is the decision, hinted at in speeches at the latest National People’s Congress, to rein in the deleveraging that began last year and which has been largely responsible for the economic slowdown in the country.

Although no-one expects Beijing to shower China with fiscal and monetary policy stimulus as it has in the past, various tax cuts are expected to help both manufacturing businesses and consumers. The authorities have clearly decided that now is not the moment to squeeze the economy any further.

The third reason to be optimistic about the outlook for Chinese shares is an apparent acceleration of MSCI’s moves to increase the contribution of Chinese A shares to its emerging market indices. The extension in the number of larger Chinese companies in the indices was expected but the introduction of nearly 170 mid-cap stocks was not.

With upwards of $2trn of investment funds tracking MSCI’s emerging market indices, the latest changes are expected to see another $125bn of new capital chasing opportunities in the A share market.

The final reason to think that Chinese shares will continue to rise this year is the low starting point at the beginning of the year after a 2018 that many investors will prefer to forget.

It’s also worth looking at the recent performance of the country’s stock market to put the latest rally in context. In the 2006-7 market rally before the financial crisis, Chinese shares rose by 500% and in 2014 they were up by 160% before the authorities clamped down on a credit bubble and snuffed out the rally. This year’s 26% rise looks anaemic by comparison.

If you think there’s further to go in Shanghai and Shenzhen, what’s the best way of gaining exposure to the Chinese market?

Given the inherent volatility of Chinese shares, many investors will want to manage the risks by including Chinese exposure in a broadly-diversified portfolio. The spikes in the region’s stock markets are fun on the way up but terrifying when they head the other way.

The Select 50 list includes a number of generalist Asian and emerging market funds, which can provide some exposure to the Chinese market without the stomach-lurching ride that a more focused investment is likely to involve.

The Maple Brown Abbott Asia Pacific Ex Japan Fund, managed by Geoff Bazzan, is a well-diversified fund with China investments alongside other regional favourites like Korea’s Samsung and Taiwan Semiconductor.

Also well spread around the region is the Fidelity Emerging Markets Fund, managed by Nick Price, which has recovered nicely so far in 2019 from a difficult spell last year.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.