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Written by: Kate Marshall | Hargreaves Lansdown
- Disruption to global trade and strained relations with the US will impact China this year.
- Problems in the property sector and weakening economic growth also key factors for the country.
- What investors need to consider in the Year of the Snake.
In China, the snake is known for its cunning and careful planning, and calculated decision making. For investors, this could signal a year of being thoughtful and measured, focusing on long-term gains over impulsive risks. Investing is never certain but it feels particularly prevalent for investors worldwide this year. The key areas to look out for in China are the potential disruption to global trade, strained relations with the US, problems in the property sector, and weakening economic growth.
US/China trade spat
There was no doubt that tariffs from the US, not only on Chinese goods, would disrupt global trade and lead to riffs and retaliations. At the beginning of February, US President Donald Trump hit imports from China with a 10% tariff above existing US tariffs. China quickly retaliated and imposed tariffs on a range of US imports, including natural gas, coal, rare metals and some cars. Its antitrust regulator also announced an investigation into Google for suspected violations of anti-monopoly laws. The problem with trade wars is they can escalate quickly, leading to potential issues such as inflation, job losses and even recession. So, the full and final detail of these new tariffs is critical, to evaluate the impact on company earnings and whether firms can absorb some of the costs.
On the domestic front, there are signs that issues in China’s property sector are bottoming, and even a revival in consumer demand following some government-led policies.
In recent years, consumer confidence has been low partly due to the weak property market (a lot of Chinese wealth is tied up in property). This has contributed to slowing economic growth, falling inflation (to 0.1% at the end of 2024) and some weakness in company earnings. Many of these issues look set to persist, but there’s some hope that the government’s announcement of monetary and fiscal stimulus in September 2024 could lead to improved growth and confidence this year.
China stimulus boosts markets
China implemented a range of stimulus measures last September, including cutting interest rates and the reserve requirement ratio (the amount of reserves lenders must hold), as well as providing government funding and support to the property market. Later in November it announced a further package to support debt-burdened local governments. These announcements provided an immediate boost to Chinese company share prices. In fact, China’s stock market turned out to be one of the world’s best-performing markets over the course of 2024. This demonstrates that the strength of an economy doesn’t necessarily translate into good (or bad) stock market returns.
The MSCI China Index grew 21.82%* in sterling terms over the year, compared with 27.32% for the USA, 20.13% for the broader global market, and 14.42% for India (which had previously been in the spotlight on account of its growth prospects). As a reminder though, past performance isn’t a guide to future returns.
Source: Lipper IM to 31/12/2024
The scale of last year’s stimulus package suggests renewed determination to support China’s economy and stabilise the market. Further stimulus measures are expected this year, but the authorities are likely to tread carefully, being wary of encouraging speculation or unnecessary financial risks.
Despite the strong performance last year, the Chinese stock market trades on a lower valuation than many other markets. This implies its shares are ‘cheap’ and could perform more strongly off the back of any good news. There are no guarantees of this though, and a market can remain cheap if prospects don’t improve, or companies struggle to grow earnings.
Two investment ideas
In the Chinese zodiac, the Snake is characterised by wisdom. This year and beyond, investors would be wise to focus on maintaining patience and keeping their portfolios diversified. Here we look at two investment ideas for exposure to China. Remember though, as an emerging market China is a higher-risk place to invest, so it should only form a part of a broader investment portfolio with a long-term outlook that can accept periods of volatility.
FSSA Asia Focus
The FSSA Asia Focus fund invests broadly across the Asia Pacific region. This includes China, as well as other emerging markets like India and Indonesia, and some more developed Asian countries such as Singapore and Hong Kong. Currently, just over a quarter of the fund is invested in China, while another 13.3% and 5.7% is invested in close neighbours Taiwan and Hong Kong, respectively.
While the fund doesn’t invest exclusively in China, it offers investors a way of getting exposure to the country without being entirely reliant on it. A diversified approach is often more suitable for investors with a smaller investment portfolio or that wish to take less risk. The fund is run by a manager and team with a long track record of investing in Asian markets. They focus on what they believe to be quality companies that have the potential to grow their earnings sustainably over the long run.
Fidelity China Special Situations
Fidelity China Special Situations invests in Chinese companies of all sizes but tends to invest more in higher-risk smaller companies than the benchmark. Dale Nicholls has managed the trust since 2014 and has the support of a large team of analysts at Fidelity.
A focus on a single emerging market, small and medium-sized companies, the use of derivatives, and a high level of gearing (borrowing to invest to try to boost returns) increases risk and means performance can be volatile. This makes the trust a more adventurous option and should only form a small part of a diversified portfolio.
Please note the share price of investment trusts can trade at a premium or discount to their net asset value (NAV). At the time of writing the trust trades at a discount of 10.48%. This compares to an average discount of 10.89% over the last 12 months.
Related: Should You Invest Now? Evaluating the Current Stock Market Uncertainty