Will China be a roaring success in the Year of the Tiger?

interactive investor experts comment ahead of Chinese New Year on 1 February.

The Chinese New Year falls on 1 February this year, and 2022 is the Year of the Tiger – an animal that denotes bravery, competitiveness, unpredictability and confidence and willpower.

But the performance of Chinese stocks has been far from a roaring success in recent history. And from an ESG perspective, some investors may prefer not to cheerfully let the tiger in for tea. Is disinvestment, rather than engagement, the best strategy? interactive investor takes a look.

The MSCI China index, which measures large and mid-cap representation across China securities listed on the Shanghai and Shenzhen exchanges, was down 21% last year, and has started 2022 with a whimper – down 0.72% (to 25 January*). Geopolitical tensions, the Covid pandemic, rising interest rates and inflation are among a number of factors which have taken a bite out of market performance.

On interactive investor, China-focused strategies have made their presence known over the past year – but there was a notable waning in the last quarter of the year amid troubles in the property sector in the country.

Baillie Gifford China fund was the sole China-focused portfolio on ii’s fund bestsellers list in 2021. Of the three China specialists in the investment trust sector, ii Super 60 rated Fidelity China Special Situations (LSE:FCSS) made the top 10 in seventh position, whileJPMorgan China Growth & Income (LSE:JCGI) just missed the cut, ranking in 11th position. The fact that there are so few China specialist investment trusts, but they are close to the top of the best buys, is thought-provoking,

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “The China growth story has been fraught with a number of stumbling blocks. Last year was a disappointing year for the Chinese market, hampered by the China’s Communist government crackdown on the nation’s tech giants, US-China trade tensions, rising inflation and interest rates and, not least, it’s attempts to maintain its zero Covid policy. This was exacerbated by long-term structural weakness such as ballooning debt, overcapacity in some sectors and ageing population.

“However, the cost of ignoring this emerging opportunity might prove too high, especially over the longer term. The emerging middle class that powered economic growth in China is tipped to help the country out of the coronavirus malaise and fuel its transformation from an export driven economy to one more focused on domestic consumption. The growth potential that this shift offers is considerable – but along the way, it can be very painful.”

ESG consideration

Dzmitry Lipski says: “China may also be uncomfortable to hold, with human rights and democratic issues in Hong Kong a very serious case in point. There are no easy answers when it comes to investing in China, but it’s a hard region to avoid, whether it comes to investing, or through our everyday lives, from technology and beyond.

“We support an active engagement approach through fund managers with strong expertise in the region, such as Fidelity, over ‘exclusion lists’. But this is a very personal issue.

“China could also hold the keys to helping tackle the climate emergency. Alibaba (NYSE:BABA), for example, wants to achieve carbon neutrality in its own operations and cut emissions across its supply chains and transportation networks by the end of the decade, and carbon neutrality by 2030 in its own emissions.”

Fund picks

Investors need to tread carefully and ii believe a good way to get exposure to the region is through a fund or investment trust.

Dzmitry Lipski says: “Fidelity China Special Situations Trust provides broad, diversified exposure to Chinese equities, including 'H' shares listed in Hong Kong and mainland-listed 'A' shares. It has been managed by Dale Nicholls since April 2014. He focuses on faster-growing, consumer-orientated companies with robust cash flows and capable management teams. Due to the trust's single country exposure, its bias to small and mid-sized companies and its ability to use gearing, its return profile is likely to be more volatile, making it higher-risk and a satellite (adventurous) holding in a well-diversified portfolio.

“Alternatively, investors could also consider a broader emerging markets or Asian fund from the Super 60 such as Fidelity Asia, Guinness Asian Equity Income funds or JPMorgan Emerging Markets (LSE:JMG) trust that can adjust exposure to China, as a more appropriate way to invest in the country.”

*Source: FE Analytics