Fuelled by the government’s mini-stimulus package, the Chinese economy is accelerating after a slowdown in early summer.
Purchasing Managers’ indices are in expansionary mode, while ‘hard’ data such as electricity production also indicate a pick up in activity. The combination of subdued inflation and accelerating growth should prove an ideal environment for Chinese equities to make gains.
With valuations attractive relative to history and performance significantly lagging developed markets this year, there may well be a mean-reversion trade into the end of the year that sees Chinese equities outperform. The use of an exchange-traded fund or index fund to implement such a trade would make perfect sense.
However, the broader Chinese stockmarket is an inefficient way of tapping into the medium-term growth potential in certain parts of the economy. Indices such as MSCI China, on which many passive funds are constructed, tend to be dominated by certain sectors and stocks.
Meanwhile, we are beginning to see some parts of the Chinese economy de-correlate from developed markets: in September China was up, but the US and Europe were down.
Because indices have made little progress, selecting the best-performing strategies is all the more critical.
GAM Star China fund manager Michael Lai’s top-down thematic approach results in the portfolio ignoring large swathes of the market. Current themes include exposure to the consumer discretionary sector and, in particular, the Macau gaming stocks. In spite of a slowdown in Chinese economic growth, the average gaming revenues per visitor have continued to grow strongly.
The majority of the portfolio is in sectors where we have a good degree of clarity about the earnings outlooks.
Another fund is the Matthews Asia Dividend fund. It invests across Asia, but has a large overweight to China with more of a focus on local champions and emerging Asia.
Tony Lanning is manager of the JPMorgan Fusion fund-of-funds range
