China: Expect continued volatility

Chinese equity markets recorded significant losses on Tuesday 9 December, with the Shanghai Stock Exchange Composite Index shedding over 5% and the Hong Kong Hang Seng Index losing 2.5% in a single day.

The move was a major influence on the fall in global equity markets, including the UK's FTSE 100, and marked a significant blip in what has otherwise been an exclusively upward trend in Chinese markets since the Bank of China announced a surprise cut to its base interest rate on 21 November.

Between then and Tuesday, the Shanghai Composite had surged an astounding 21.5%, boosting 12-month gains to over 45%.

Tuesday's losses wiped over 5% from this gain and David Stubbs, global market strategist at JP Morgan Asset Management, warns investors to expect continued volatility.

Volatility 

"If you look at the composition of this market, in Shanghai it's mostly state-owned enterprises which are still heavily indebted and have declining profitability. The recent Hong Kong Shanghai connect programme also only allows northbound investment into around 500 stocks out of 971.

"So really the Chinese stockmarket is not very deep, not very sophisticated and not very transparent and when you have those kind of conditions in place you are going to get a lot of volatility as sentiment switches in and out," says Stubbs.

However, over the longer term Stubbs does not believe that Tuesday's falls, nor sustained market volatility thereafter, mark the beginning of a downward trend for China.

"Our view of China is that it had to slow, it has slowed and we are now nearer the end of that than the beginning. An awful lot of stuff has been priced into Hong Kong, Shanghai and other regional markets - including lower oil prices - so I don't see a hard landing for China at all.

"The big question mark is the housing market; how important it's been in pushing the economy forward and how much damage it can do if there are significant falls. However, the Chinese government is pushing through a lot of healthy reforms while they have a range of tools that they can apply to deal with a slowdown," says Stubbs.

For those investors interested in accessing Chinese markets, however, Stubbs advises doing so through a "good local fund manager that knows what they're doing" as despite stronger term prospects, investing in China is likely to be "a bit of a wild ride" for the foreseeable future.

Rated Fund entry point

Of Money Observer's Rated Funds in the Asian Equities grouping, JP Morgan Chinese Investment Trust is the only one to offer exclusive exposure to China.

Managed by Howard Wang and Emerson Yip, the trust has returned 16.6% over six months and 10.7% in share price total return over the year to 9 December while swelling its net asset value (NAV) by 5.3%.

The trust also has an impressive long-term track record, delivering 232.5% in share price gains and 221.9% in NAV growth over the past 10 years.

Currently the trust's share price discount to NAV stands at 4.99%, significantly below its 12-month average of 11% but arguably still an attractive entry point for those keen to access the trust.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.