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Investing in the Year of the Pig

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Gong hei fat choy. The Chinese New Year starts today and more than one fifth of the world’s population will be ushering in the Year of the Pig with some quality family time, tangerines and maybe even a few lucky red envelopes.

Such is the scale of celebrations that family reunions will cause the largest human migration in the world and more fireworks will be set off across the globe than on any other date this year.

investing-year-pig

By now, we’re used to hearing record-topping statistics like these from the East especially where population and economic progression are concerned. However, investor attention has largely been elsewhere over the past year, as fears over China’s future prospects and the ongoing trade war with the US have shaken investors used to years of nothing but stellar growth.

While the country’s 6.6% economic growth in 2018 might still look impressive for any other nation, it marks a 28-year low for China. And to top off investor worries, there is the issue of public and private debt topping $34trillion.

Those born in the Year of the Pig are said to be honest, straightforward and patient, and while investors in the region have certainly had to keep that last trait in mind over the past year, there are a few main reasons why they haven’t abandoned the country just yet.

China’s cheap

Tariff wars, data misuse at tech firms and political upheaval really weighed on global markets in 2018, with China coming out worse than most. Since this time last year, the MSCI China index is down over 18%, however given how central the country has been to global worries, it might be a surprise it isn’t down by more. So, investors might be looking to snap up a bargain but there are a few considerations to make here before jumping in.

First is whether the market can accept a slowing national growth rate in exchange for evidence of a maturing and stabilising economy. The government’s latest five-year economic plan has looked to get this message across, emphasising the quality of growth over absolute growth.

In China’s case, this means taking the focus away from previous growth engines like debt-fueled public spending and exports, and turning the economy over to a consumer-driven model much as we are more used to in the West. A transition like this inevitably eschews outright growth in the short-term but if investors can put up with that, the prospect is longer-term, more stable economic development.

Second, in an economy as large as China’s, and especially one experiencing such a transition, company fortunes can differ greatly. This means a highly selective investment approach can be useful, identifying the winners and leaving out the laggards of the index. Dale Nicholls, manager of the Fidelity China Special Situations investment trust, looks to do exactly that and currently holds the likes of Tencent and Alibaba.

And finally, a resolution to US-Chinese trade tariff tennis would boost all markets but especially China. As another round of talks take place this week investors will be looking for signs of accord, or at least assurances of progression between the two sides before the end of the month.

If March comes without a deal in place, Trump has said further tariffs could be put in place. The Chinese government has encouraged domestic demand, backed up by tax cuts, to offset the lost export income so far but to fully convince investors a firm US-China deal is needed.

Five year performance

(%)

As at 4 Feb

2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
MSCI China 14.7 -26.0 24.5 52.2 -18.3

Past performance is not a reliable indicator of future returns

Source: MSCI, as at 4.2.19, price index in USD 

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. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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.