Fund review: China/Greater China

With China’s banking system under pressure, the stockmarket saw a considerable dip in June, with the Shanghai Stock Exchange index falling 14.05 per cent in the month.

Coupled with weakening data, it could be argued that China is slowly falling from its pedestal.

The IMF downgraded its growth forecast for China to 7.8 per cent for 2013 and 7.7 per cent for 2014 in its latest World Economic Review published this month, and June’s trade data revealed slowing exports and a fall in imports.

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Last week, data from the National Bureau of Statistics of China showed a continuing slowdown in the emerging market’s economy, falling to 7.5 per cent in the second quarter of 2013.

But is there any real reason for investors to be concerned? After all, compared with the UK and US, 7.5 per cent annual growth is exceptional.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, says: “It is very popular to be negative on China at the moment. Concerns over the banking system and fears the Chinese leadership are not doing enough to manage the economic slowdown and avoid a crash are keeping investors away.

“However, growth at 7.5 per cent is in line with expectations and China’s five-year plan, which has a target growth rate of 7 per cent per annum.”

The five-year plan outlined a series of changes for China, most notably the intention to switch from an export-driven manufacturer to a consumer-focused economy. Mr Lowcock admits that for any economy, this is a difficult transition to make.

“These challenges will not lead to a smooth rise in the [Chinese] stockmarket,” he says. “It is difficult to tell exactly how well companies are doing or the accuracy of the economic data being reported.

“However, Chinese shares are valued at levels which currently reflect a negative outlook on the Chinese economy and much of the bad news is already priced in.”

The IMA China/Greater China sector was formed in November 2010 following a significant increase in the popularity of China-focused funds among retail investors.

The 38 constituents of the sector invest at least 80 per cent of their assets in equities in China, Hong Kong or Taiwan.

Topping the sector based on performance since its creation on November 23 2010 to July 15 2013 is the First State Greater China Growth fund, co-managed by Martin Lau and Sophia Li. In this period the fund has delivered 21.1 per cent, compared with a sector average loss of 5.49 per cent, according to FE Analytics.

The worst-performing fund during the period, by comparison, is the Legg Mason LMHK China fund, which lost 15.7 per cent.

China and other emerging markets have been popular investments since the developed world buckled under the pressure of the financial crisis back in 2007, but the fact remains these markets are riskier when it comes to exposure in a portfolio.