Interactive Investor

The worst-performing fund sector of 2023 is staging a recovery – will it last?

Saltydog Investor explains why this fund sector has had a miserable couple of years, but may now be turning a corner.

5th March 2024 13:02

Douglas Chadwick from ii contributor

This content is provided by Saltydog Investor. It is a third-party supplier and not part of interactive investor. It is provided for information only and does not constitute a personal recommendation.

The worst-performing sector last year was China/Greater China, down over 20%, and it did not have a particularly good start to this year.

In January, the Japanese stock market was the fastest out of the blocks, with the Nikkei 225 gaining 8.4%, and US and European indices also went up. In the UK, the FTSE 100 and the FTSE 250 both went down, but the biggest losses were in China and Hong Kong. The Shanghai Composite ended the month down 6.3% and the Hang Seng fell by 9.2%.

However, their fortunes turned in February. The Shanghai Composite went up by 8.1% and the Hang Seng gained 6.6%.

Stock market indices2023 2024
IndexCountry1 Jan to 31 March1 April to 30 June1 July to 30 Sept1 Oct to 31 DecJan 2024Feb 2024
FTSE 100UK2.4%-1.3%1.0%1.6%-1.3%0.0%
FTSE 250UK0.4%-2.7%-0.7%7.7%-1.7%-1.6%
Dow Jones Ind AveUS0.4%3.4%-2.6%12.5%1.2%2.2%
S&P 500US7.0%8.3%-3.6%11.2%1.6%5.2%
Nikkei 225Japan7.5%18.4%-4.0%5.0%8.4%7.9%
Hang SengHong Kong3.1%-7.3%-5.9%-4.3%-9.2%6.6%
Shanghai CompositeChina5.9%-2.2%-2.9%-4.4%-6.3%8.1%

Data source: Morningstar. Past performance is not a guide to future performance.

This is also reflected in our latest sector analysis. The China/Greater China sector, which went down by 9.7% in January, has rebounded since the Chinese New Year and is now showing a one-month gain of 9.3%. Hopefully the Year of the Dragon will be much better than the Year of the Rabbit.

It is no surprise that funds from the China/Greater China sector also dominated our top 10 table last month. The leading fund, Matthews China Small Companies, went up by 14%.

Saltydogs top 10 funds in February 2024

Fund nameInvestment Association sectorMonthly return
Matthews China Small CompaniesChina/Greater China14.0
BGF Systematic China A Share OpportunitiesChina/Greater China11.7
GAM Star China EquityChina/Greater China11.0
Pictet-China EquitiesChina/Greater China10.7
Man GLG Continental European GrowthEurope Excluding UK10.6
Ninety One GSF All China EquityChina/Greater China10.4
JPMorgan China Growth & Income Ord (LSE:JCGI)China/Greater China10.3
Allianz China A-Shares EquityChina/Greater China10.2
abrdn China A Share EquityChina/Greater China10.2
Polar Capital Global TechTechnology & Technology Innovation10.2

Data source: Morningstar. Past performance is not a guide to future performance.

There are a number of reasons why Chinese stocks have struggled over the past few years.

China’s zero-Covid policy, which was in place long after most countries had started to relax restrictions, led to repeated lockdowns in major cities and significant disruptions in economic activity. This affected everything from factory output to consumer spending.

At the same time, there was a collapse in the Chinese property market.

The global economic environment did not make it any easier. The recovery from the Covid-19 pandemic varied from country to country all around the world, contributing to supply chain bottlenecks, rising commodity prices and inflationary pressures worldwide. Central banks in major economies had to impose tighter monetary policies to combat inflation, leading to a reassessment of risk and a potential shift away from equities, particularly growth-oriented sectors that had benefited from low interest rates. This affected emerging markets broadly, with Chinese stocks being no exception.

Looking at the performance of the Matthews China Small Companies fund, you can see that it has almost halved in value since the beginning of 2021. Just because it has had one good month does not mean that it has stopped going down for ever, but perhaps this could be the start of a recovery. Some of the headwinds that were affecting global economies seem to have abated, and that could have a knock-on effect in China and the emerging markets.

Past performance is not a guide to future performance.

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