Ian Cowie: I’ve sold this market but it keeps on rising

Share prices surged on Tuesday after America announced a surprise 90-day extension before it applies punitive 145% tariffs on imports from China. Is this an opportunity for investors to gain access to the world’s second-largest economy or just a temporary truce and a trap for the unwary?

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Investment trusts in the Association of Investment Companies (AIC) “China: Greater China” sector amply illustrate the extreme volatility, risks and rewards, experienced recently. The average China investment trust shareholder has seen their capital shrink by nearly 6% over the past five years but, more happily, also enjoyed an eye-stretching total return of 52% over the past year. The typical 10-year return remains an inspirational 141%.

Never mind averages; what about specifics? Fidelity China Special Ord (LSE:FCSS) is the stand-out winner with sector-topping returns over the past year, five years and decade of 56%, 3.5% and 168% respectively. That’s an impressive hat-trick, albeit in a sector where there are only three funds.

Despite such sustained success, FCSS shares continue to be priced -7.2% below their net asset value (NAV). Its £1.9 billion portfolio is led by the internet giant Tencent Holdings Ltd (SEHK:700), with ByteDance, the owner of the video-sharing website TikTok, not far behind.

Perhaps surprisingly for investors who have not looked at China funds recently, FCSS also delivers a dividend yield of 2.8%. Better still, it has increased shareholders’ income by an annual average of 13.5% over the past five years.

Dividends are not guaranteed and can be cut or cancelled without notice. However, if FCSS could sustain that rate of ascent, it would double its distributions in five years and four months.

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Relatively tiny Baillie Gifford China Growth Trust Ord (LSE:BGCG), with assets of £180 million, stands second in this sector with returns of 46%, -21% and 35% over the usual three periods. Relatively weak performance over the medium and long-term reflects how this manager’s “growth, growth, growth” style has fallen from favour and there is little comfort for shareholders in a meagre dividend yield of 0.8% that has shrunk by an annual average of 21% on the same basis as above.

Tencent and ByteDance are BGCG’s top holdings, followed by the e-commerce giant Alibaba Group Holding Ltd ADR (NYSE:BABA), which is sometimes described as China’s answer to Amazon.com Inc (NASDAQ:AMZN), although Alibaba is primarily a business-to-business (B2B) website, whereas Amazon is business-to-consumer (B2C). Another top 10 holding is Kweichow Moutai, which overtook Diageo (LSE:DGE) as the biggest distiller in the world in 2017. BGCG shares remain priced at an -8.8% discount to NAV.

JPMorgan China Growth & Income Ord (LSE:JCGI) ranks third over the last year with total returns over the usual three periods of 33%, -36% and 108%. Shareholders have paid a substantial price in reduced capital growth for a sector-topping yield of 4.3% that has grown by an annual average of just over 8%. If that rate of growth is sustained, it would double investors’ income in nine years.

Tencent and Alibaba are the top holdings in this £235 million portfolio, followed by Meituan Class B (SEHK:3690), another e-commerce platform that makes a market in China-sourced services, as well as products. JCGI trades at the widest discount in the sector; -9.2% below NAV.

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Returning to where we began, it’s important for investors tempted by some of the spectacular growth and income figures above to beware that US President Donald Trump’s latest about-turn on tariffs might prove temporary. Most immediately, his talks with Russian President Vladimir Putin might also affect America’s attitude to China.

Coming down from the clouds of geopolitics to the personal, it is only fair to admit I first invested in China after a couple of business trips there 30 years ago, when JCGI was called Fleming Chinese Investment Trust. After flipping into FCSS in the Noughties, I took profits in 2008 to buy a classic wooden boat, which I still sail today.

Less happily, after learning about China’s mistreatment of more than a million Uyghurs, its Muslim minority, which the Joe Biden administration described as “genocide”, I sold the lot in 2020 at 227p. FCSS traded at 293p this week but I have no regrets because active investment implies choice about what we support with our money.

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More positively, it’s important to remember that a sixth of humanity - or, precisely, 17% -  is Chinese. The scale of the economic opportunity that represents is demonstrated by the extraordinary popularity of the BGCG top 10 holding Kweichow Moutai, despite this spirit’s taste being likened by critics to liquid razor blades.

When America first renewed relations with communist China more than 50 years ago, the US Secretary of State at that time, Henry Kissinger, told his Chinese counterpart, Deng Xiaoping: “If we drink enough Moutai, we can solve anything.”

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