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 TIME last year, investors might have expected bumper returns from the Chinese stock market in 2021. It had been the only major economy to deliver positive growth in 2020 and its stock markets were buoyant. The IMF was forecasting growth of 8.1%1 and the country’s robust approach to the pandemic had limited the need for further lockdowns.  
 
There were also structural reasons to think that investment in Chinese markets may be a good idea. The ‘Stock Connect’ progamme, introduced in 2014 and extended in 2016, allows cross-investment between the A shares markets in Shanghai and Shenzhen, and the H Shares market in Hong Kong, creating liquidity and growth. A buoyant IPO market was opening up opportunities in new and innovative companies.   

Instead, it has proved a disappointing investment. With the exception of Latin America, it has been the worst-performing major equity market across the globe2. The catalyst was the Chinese government’s intervention in a number of key sectors, including education, e-commerce, property, and gaming. Many large-cap Chinese companies, such as Tencent and TAL Education, slumped, as investors feared that the government’s anti-capitalist instincts were reviving. The subsequent scandal at over-indebted property group Evergrande has also deterred foreign investors.

At the start of 2022, this leaves with investors with a dilemma. Many Chinese stocks look cheap, particularly relative to their US equivalents. The average fund in the China/Greater China is down 9.3% and there are now significant discounts opening up in the investment trust sector. For example, the Baillie Gifford Greater China trust was trading on a 15% premium to its net asset value this time last year. Today, it is at a 5% discount3. The JP Morgan China Income & Growth investment trust was at a premium of over 5% and now trades at a 5% discount4.

If investors are convinced of the long-term case for China, this may be a moment to take another look at the country. After all, China is still scheduled to become the world’s largest economy over the next decade, with thriving consumer and green energy sectors. Plenty have argued that rather than interfering in capitalism, the recent clampdown was much-needed intervention in socially-damaging sectors - and the West will ultimately need to follow its lead.

Equally, the Chinese economy may have weakened, but it still outpaces most developed economies. While retail sales, industrial production and fixed asset investment growth have all come in below expectations, there are a number of reasons to hope for a better year in 2022. Having tightened monetary policy in 2021, the authorities have begun to loosen lending rules again, which should prove supportive.

Ultimately, the long-term growth trajectory for China is strong and investors are likely to get relatively few opportunities to buy in at lower valuations. However, they need to tread carefully, picking sectors that are aligned with the government’s goals so as not to fall foul of any intervention. That means companies that support the country’s goals of technological self-reliance and the energy transition.

Source:
1 IMF World Economic Outlook 
2 Trustnet 
3 Quoted Data
4 Quoted Data

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. 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 a Fidelity’s advisers or an authorised financial adviser of your choice.

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