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

New record highs on Wall Street have become a familiar sight over recent months. Accompanying them have been notes of caution about share valuations, narrow market leadership, the uncertainties posed by a forthcoming election and rates of coronavirus infections that say the pandemic is far from over for the Americas.

Less obtrusively, China’s stock markets have also gained considerable ground since the spring and are now back within touching distance of their 2015 highs. Since the start of this year, the CSI 300 Index – which tracks shares on China’s Shanghai and Shenzhen exchanges – is up by just over 17%, compared with about 8% for America’s S&P 5001. Please remember past performance is not a reliable indicator of future returns.

The IMF expects the Chinese economy to grow by 1.9% this year and by 8.2% in 2021. That’s impressive given that all the world’s other major economies are expected to contract in 2020, only returning to growth over the following 12 months2. Investors clearly see an opportunity.

China’s international trade is certainly back with a bang, confirming the country is widely open for business again. Imports soared 13.2% last month as China tried to buy enough raw materials to satisfy its own markets as well as the demand from other countries wrestling with reduced manufacturing capacities3.

China’s economic recovery since the first quarter of this year has been closely intertwined with its handling of the coronavirus, a pursuit in which it has decisively outperformed the US. Weekly cases of Covid-19 had reportedly fallen close to zero by late March, following strict lockdowns and social distancing measures that successfully interrupted transmissions from Wuhan to much of the rest of the country4. China understood what it needed to do and executed it well.

Today, China is starting to reap some of the rewards, including the return of social mobility and confidence among Chinese consumers. Domestic retail sales, which have lagged other indicators of economic activity such as industrial production until recently, recorded their first positive year-on-year growth of 2020 in August. Total sales were 0.5% higher than during the same month in 2019, with purchases of mobile phones, cosmetics and cars all positing strong double-digit gains in value terms5.

By most accounts, China may already have emerged economically from the pandemic having sustained far less damage than other countries. Crucially, it will emerge with less debt than the developed world and, therefore, with a greater ability to stimulate economic growth in the future, should it be needed.

Today the CSI 300 Index trades on a bit less than 19 times the earnings of the companies it represents, which looks reasonable, especially given the rate at which China’s economy is expected to grow next year6. Compared to the valuation currently applied to US companies, which operate in a significantly slower growing business environment, China’s rating looks undemanding.

A weaker dollar, after several years waiting for one, is a further positive. Historically, a weakening US currency has triggered international funds to flow into emerging markets.

One caveat to the outlook is that some technology companies – as in America – have turned in stunning performances this year. You might argue that, to an extent, this is justified because the world has been irreversibly altered by the pandemic.

However, the risk is the current valuations of tech companies may move into reverse should China and the world revert to old ways of doing things when this is all over. This is a question hovering over all countries though, alongside how far the world will choose to travel down the sustainable energy path given prevailing low oil prices. Only time will tell how irreversible or otherwise this year’s changes to our daily lives have become.

Overall, the latest data does nothing to challenge the idea that a longer term shift in economic power and influence from west to east may have fast forwarded just a little during the pandemic. Recent strong returns from Chinese shares may just have taken us to another staging point along the way.

Fidelity’s Select 50 list features a number of funds that invest highly selectively across the Asia Pacific and currently have large holdings in Chinese companies.

The Fidelity Asian Special Situations Fund is one such example. This fund targets growth opportunities displaying valuation anomalies and finds them in both high quality growth companies as well as others more sensitive to changes in the economy at large. Current top holdings include the Chinese consumer stocks Alibaba, Tencent and China Mengniu Dairy as well as the Hong Kong based, pan-Asian life insurer AIA Group.

The Matthews Asia Funds – Pacific Tiger Fund invests in companies with sustainable long-term growth prospects and has a relatively high exposure to Asian domestic consumer companies. Alibaba, Tencent and AIA Group feature prominently here as well, alongside China Resources Land and China Resources Beer.

Five year performance

(%) As at 30 Sept 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
CSI 300 -7.9 17.9 -10.4 10.9 20.2
S&P 500 15.4 18.6 17.9 4.3 15.2

Past performance is not a reliable indicator of future returns

Source: Refinitiv, total returns as at 30.9.20, in local currency

Source:

1,6 Bloomberg, 15.10.20
2 IMF World Economic Outlook, October 2020
3 Reuters, 13.10.20
4 Bloomberg, 18.03.20
5 National Bureau of Statistics, 17.08.20

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. 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.

Topics covered

Active investing; Asia and emerging markets; ChinaVolatility

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