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.
This week, China celebrates the start of the year of the Ox. Sturdy, hard-working, reliable, investors will hope that China’s stock market can adopt those characteristics to build upon last year’s remarkable outperformance.
A lot of attention was paid to the US’ ‘V-shaped’ market recovery last year. Not enough was given to China’s. Over the past 12 months, China’s CSI index has delivered a 45% return, while America’s S&P 500 managed just 18% (by comparison, the FTSE 100 has made an 8% loss).
It’s not hard to explain that outperformance. China’s stock market benefitted from exposure to pandemic beneficiaries of the sort that also buoyed the US (and weighed on the FTSE). Investors rewarded fast-rising “growth” technology and healthcare stocks far more than old-economy “value” stocks.
That trend could continue this year too, especially in consumer sectors as the Chinese government encourages internal demand to offset US trade tensions.
And, unlike the US, China also enjoyed a swift economic recovery.
‘First in, first out’ of the pandemic, it was the only major economy to deliver positive growth in 2020, despite registering its first quarterly decline in output for more than 40 years over Q1.
Overall growth reached 2.3% for the year as a whole, with state supported industrial production leading the recovery (again, it’s a sorry comparison: the UK economy contracted by 9.9%, its biggest contraction in over 300 years; even US GDP was down 3.5%, its worst fall since the Second World War).
But, as we know, past performance does not necessarily mean the same future returns. All eyes will be on whether China’s Ox can continue to outpace the Wall Street Bull. Most believe it will - consensus forecasts for this year predict Chinese GDP growth of 8%. Investors have ploughed record sums into Emerging Markets recently, anticipating their outperformance through 2021.
Investors in China will be looking forward especially to the country’s 14th five-year plan, to be unveiled in March, which is expected to set a growth agenda to focus on social stability and economic strength.
But there are risks. China is still an emerging market (it’s easy to forget), so it can be more volatile than developed markets. Last year’s CSI index was a tearaway success, but in 2015 it was one of the world’s worst performers when it fell 25%.
There are also no guarantees that the year of the Ox will replicate the successes of last year’s Rat. Inflationary pressures or policy tightening could shoot the lights out on China’s big growth outperformers.
Signs of the latter are already starting to emerge. Concerns over policy tightening caused Chinese stocks to slump early in January.
Jitters like these will put added pressure on valuations that already look stretched. Robust earnings growth is expected for Chinese companies in at least the first two quarters, but they’re not guaranteed. The next few months could tell us a lot about how far today’s prices are to be trusted.
And while a Biden presidency is better news for US-China relations than the alternative, the threat of trade tensions is ever present.
Investors, then, will be looking for the year of the Ox to build upon the Rat's abundance. China comes with risks, but for investors looking for exposure to global growth, it still presents a convincing case.
There are several Emerging Market funds with sizeable exposure to China, such as the Artemis Global Emerging Markets Fund, which features on our Select 50 list of favourite funds and currently has 43.6% of its holdings in the country.
Five year performance
|(%) As at 31 Jan||2016-2017||2017-2018||2018-2019||2019-2020||2020-2021|
Past performance is not a reliable indicator of future returns
Source: Refinitiv, returns in US dollar terms as at 31.01.21
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. 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.
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