Are the stars aligned for China in the Year of the Ox?

As Chinese New Year approaches, interactive investor examines China-focused investments.

12 February marks the start of the Chinese New Year. 2021 is the Year of the Ox, and hopefully will mark a more optimistic 12 months as the ox denotes hard work, positivity and honesty, according to Chinese astrology.

While the MSCI China Index was up 47% last year (see table below for longer-term data), a more positive year would be welcomed by investors following the tragic and tumultuous Year of the Rat last year, plagued by the Covid-19 pandemic, which has taken root across the globe, upending personal and economic lives.

But from an economic perspective, China has proven more resilient, emerging from the rough coronavirus-stricken 2020 in remarkably good shape – boasting a GDP growth of 2.3% for the year, making China the only major economy in the world to avoid a contraction last year, and the MSCI China Index is up 12% this year to date (to 2 February 2021).

Chinese-focused investments have crept up interactive investor’s most-bought investments list in recent history. Of the three China specialists in the investment trust sector, two made the top 10 in January 2021, a theme that started to emerge in October last year.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “China’s economic growth story is at odds with the plight of the ongoing coronavirus crisis in the Western world, and there are signs to suggest the region remains poised to expand further this year. The rise of the Chinese consumer is a huge growth theme, which is still very much intact despite the pandemic - meaning avoiding China could potentially be costly over the long term. It’s the world’s second-largest economy, after all.

“However geopolitical tensions with the US remains a challenge for China [and they] could persist for years to come despite the change of president in the US.

“China may also be uncomfortable for ESG-conscious investors and the human rights and democratic issues in Hong Kong are a very serious case in point. There are no easy answers when it comes to investing in China. ESG is not as mature as in western markets – but they are improving, and in an interactive investor poll of ethical fund managers earlier this year, one leading fund manager stated that ‘US regulations and the Chinese approach to ESG will also matter and weigh heavily on the shape of sustainable investing’.

“This is something that has since started to play out, with China last year announcing that it aims for ‘carbon neutrality’ by 2060. In other words, China could hold the keys to tackling global climate change.”

Investment trust picks

Dzmitry Lipski, says: “ii Super 60-rated Fidelity China Special Situations (LSE:FCSS) Investment Trust managed by Dale Nicholls, is a good option for the adventurous investor. It focuses on faster-growing, consumer-orientated companies with robust cash flows and capable management teams.

“The manager constructs a diversified portfolio of 130 to140 high-quality stocks from the bottom up and is likely to have a bias to the under-researched small and mid-cap space, which looks set to benefit if the Chinese market continues on its bull run. He is also allowed to invest in unquoted stocks and use gearing to enhance the trust performance.

“From an ethical standpoint, Fidelity has an active engagement approach with the companies it invests in around the world, including China - and favours this over ‘exclusion lists’. The investment trust returned 93% over the year (to 2 February 2021) and 28% and 17% over five and 10 years respectively (on an annualised basis).

“But there is also merit in taking a diversified approach to China as part of a broader way to access Asian markets and it comes down to choose. We like Pacific Assets (LSE:PAC) Investment Trust, which invests within an ethical framework and has around 4% of its assets in China, and 8% in Hong Kong. Companies are classified into one of three sustainability sectors: sustainable goods and services, responsible finance, and required infrastructure. There is also a strong emphasis on ‘quality’ businesses that can perform well over the business cycle.

“We would recommend 10 to 15% in Asian markets specifically, bearing in mind that if you are invested in a global fund, you will probably have additional Asian and Chinese exposure there. For example, Scottish Mortgage, which has been the most popular investment trust with interactive investor customers for some time, has around 24% of its assets in China. In contrast, F&C, another widely held investment trust that also features alongside Scottish Mortgage on our Super 60 rated list, has just 3% of its assets in China. So, when deciding how much to invest in a Chinese or Asian fund, think about the exposure you may already have.”

Annualised Return in GBP
Source: Morningstar to 2 February 2021. Past performance is no guide to the future.