Ian Cowie: China is cheap, but I prefer India and Vietnam

Our columnist is not tempted to buy back into China. Here he explains why, and names the three emerging market trusts he owns in his ‘forever fund’.  

Investors in China have suffered sharp losses over the past year, but the 74,000 renminbi question in the fortune cookie is whether this country is now a bargain for the brave - or is there yet worse to come?

That conundrum is encapsulated by the eye-stretching 7.3% dividend yield on JPMorgan China Growth & Income (LSE:JCGI), which would have seemed scarcely credible a few years ago. JCGI has delivered sparkling total returns of 160% over the last decade and 55% over the last five years, according to independent statisticians Morningstar, but shrunk shareholders’ capital by an eye-watering 50% over the last year. Even so, memories of happier times help JCGI shares to continue trading at a 1.1% premium their net asset value (NAV).

By contrast, trusts in the Association of Investment Companies (AIC) ‘China/Greater China’ sector - set up recently when this emerging market was all the rage - now trade at an average discount of 1.2% below NAV, having delivered total returns of 125%, 22% and minus -45% over one, five and 10 years.

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To put that in context, investment trusts of all descriptions trade at an average discount of 4.9% with total returns of 188%, 50% and 0% over those three time periods.

China, which remains the second-largest economy in the world, has been hit by a ‘perfect storm’ of separate headwinds. First, rising inflation and interest rates have made investors less enthusiastic about ‘jam tomorrow’ stocks that pay low or no income today. Until recently, many China stocks paid no dividends and were primarily priced on hopes of growth tomorrow.

Second, this country is where the earliest cases of the coronavirus were identified in Wuhan, a city of 11 million souls in central China, before Covid became a global crisis. It remains to be seen whether the Wuhan Institute of Virology or China will be definitively blamed for the pandemic but news of a fresh outbreak and a new lockdown in Shenzhen this week demonstrates that the danger is not past. Shenzhen is the third-largest container port in the world and was already a major manufacturing hub when work took me there 25 years ago.

Third, and least important for many investors, human rights abuses - including one million members of a Muslim minority, the Uighurs, who are confined to forced labour camps - have been condemned as “genocide” by US president Joe Biden. That was what caused this investor in China, since the handover of Hong Kong in 1997, to sell all my shares in Fidelity China Special Situations (LSE:FCSS) at 227p in April 2020.

A 10% bounce in FCSS on Wednesday took them back above that but I have never regretted my decision to bail out of China because I would rather not profit from other folk’s misery. Many cynical commentators mocked me for this move, but I have heard rather less from them since Russia’s invasion of Ukraine reminded everyone about the dangers of investing in dictatorships.

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Whether they know it or not, this includes shareholders in Britain’s biggest investment trust; the £14.8 billion giant, Scottish Mortgage (LSE:SMT). Despite reducing their exposure to China over the last year or so, more than 12% of SMT’s assets remain there, dragging total returns down from their former glory of 581% over the last decade and 154% over five years to a much less satisfactory -24% in the last 12 months.

Just like JCGI, the big question for SMT shareholders and prospective investors is whether their current low ebb represents good value and an attractive entry point. Or are they cheap for good reason and about to become cheaper still?

Lacking a crystal ball, I will dodge those questions but repeat the confident assertion made here several times in recent years that we do not need to invest in China to participate in the commercial dynamism of Asia. For example, I bought shares in Vietnam Enterprise (LSE:VEIL) in July, 2018, at 404p.

They cost 722p this week and might have further to go as China’s problems create opportunities for its neighbours.

Despite strong total returns of 21% over the last year, 116% over the last five years and total assets of £1.9 billion, VEIL remains off the radar for most investors and its shares are priced 21% below their NAV. Against all that, even its most enthusiastic supporters would struggle to describe Vietnam as a democracy.

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Bargain-hunters who prefer to focus on emerging markets where the population can get rid of the government and enjoy legally enforceable property rights might prefer JPMorgan Indian (LSE:JII), which trades at a 19% discount to NAV. This was my very first ten-bagger, after I bought shares for 63p in June 1996. The trust traded at 775p this week.

To be fair, JII’s returns have been disappointing in recent years and so I also invested in India Capital Growth (LSE:IGC) at 120p last September. Since then IGC has slipped to 110p this week, priced 15% below NAV.

Stock market investors must be prepared to accept the rough as well as the smooth of share price volatility; nowhere more so than in emerging markets. No wonder City cynics sometimes define an emerging market as a market from which it is difficult to emerge.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is an investor in JPMorgan Indian (JII), India Capital Growth Fund (IGC) and Vietnam Enterprise Investments (VEIL) as part of a globally diversified portfolio of investment trusts and other shares.