We were recently approached to contribute to an article to be published in Moneywise magazine in May. Below are our thoughts:
Is there a bubble in China? Is it about to burst? Are fears that China is overheating exaggerated?
Below is a list of questions we want to answer for our readers:
With regard general thoughts on China there have been periods of speculation that China is forming a ‘bubble’; unfortunately only time will tell. There are certain country specific factors that make forecasting along the usual lines very difficult; perhaps most notably the level of Government intervention and control on matters such as the currency. Emerging Markets in general tend to be a relatively volatile area and will most likely continue to have periodic setbacks. However, just as characteristic at present are periods of significant growth. The long term story of development, consumerism, and growth remains convincing in my view. The key point here is that this is a long term view over 10, 20 years and beyond, I have no doubt that the short term picture will continue to be relatively turbulent at times.
Just as you have to be careful not to get too carried away with some of the more spectacular statistics claimed in respect of China’s future growth, it is also important in my view not to lose sight of the long term potential of the area.
Global markets seem more correlated than ever with the growth in international trade, and this was certainly the case to a great extent with the recent global recession. For example many multinational companies in the UK are now dependant to a greater or lesser extent upon profits from abroad, including Emerging Markets.
1. If you want to invest in China where should you start?
With developed markets and economies likely to be feeling the effects of the ‘credit crunch’ for some time to come, Emerging Markets are seen by many as the main source of growth for the future. This applies in particular to the UK which has been particularly affected by the global recession. Emerging Markets in general were seen as the long term providers of global GDP growth prior to the credit crunch – and this has only been exacerbated by the events of the past couple of years.
At the centre of this theme is the development of China which has experienced huge economic growth and development in recent years and continues to do so. Many people want to invest in this potential and benefit from this growth. In recent years much of China’s growth has been attributed to providing consumer goods to the West and developed economies. However, it is also worth bearing in mind its own internal development which has seen huge investment in infrastructure (roads, railways, airports etc…) and significant growth in consumerism.
It is worth taking financial advice upon the most suitable route to invest in China as Emerging Markets in general are a traditionally volatile & complex area. This may be directly or indirectly via Chinese companies, or via multinational companies who are partaking in the growth story.
2. What are the various ways you can invest in China?
As touched upon above you could consider direct investment into the area via company shares, although this would only really be recommended for highly experienced investors due to the specific risks of holding individual shares (i.e.: a lack of diversity). The most suitable route for most is via some sort of ‘collective’ investment such as a Unit Trust or OIEC. There is now a huge variety of choice from very specialist funds to more general global funds with exposure to the area.
3. What are the benefits/disadvantages of different ways of accessing China: (single country funds vs. regional funds, investment trust vs. unit trust vs. tracker fund?)
For most people these are decisions that should be made with an investment professional after assessment of your attitude to risk and objectives and taken in the context with the rest of your portfolio.
However, generally speaking, a single country fund will carry more risk and volatility as it is more sensitive to changes in that single economy. Factors such as political risk and even natural disasters then come more into focus. This is not a suitable risk for everyone. By investing in a well managed regional fund you are then accessing the fund manager’s expertise, the hope being that they will use their specialist knowledge of the area to manage the fund according to the prevailing conditions of that time. Likewise, many of the more successful global actively managed funds will carry a reasonably high exposure to the area.
In terms of tracker funds, these can be a very good route for people looking to benefit from the areas growth in general terms over the long term. They tend to offer reasonably low charges and can give a portfolio exposure to the region. The key questions here are:
• Which index is tracked?
• What is the tracking method?
• What is the tracking error?
• What are the costs charges?
With regard the Investment Trust vs Unit Trust question, there are certain features of investment trusts that make them a higher risk investment, relatively speaking. These include the fact that they can trade at a discount or a premium to net asset value (NAV) and also ‘gear’ (or borrow) – both of these factors can exaggerate gains or losses. Therefore, in what is already a relatively high risk area, Unit Trusts may be a more suitable route for many.
4. What percentage of someone’s portfolio should be invested in China depending on their risk profile? (low, medium, high)
Again, this question depends largely upon an individual’s existing portfolio and attitude to risk, and opinion will vary. The area may not be suitable for a low risk investor at all, or perhaps only via some managed exposure in a global fund. In terms of a medium and higher risk investor I would perhaps be looking at a maximum of 5% and 10% respectively. However, this should be combined with investment across other Emerging Markets and blended with the rest of their portfolio.
5. What three funds would you recommend to your clients (one for each risk category)?
For a low risk investor, if suitable at all (dependent upon the factors listed above), I would perhaps consider a holding in a global fund with a reasonable weighting in the area such as Neptune Global Equity. This fund holds around 45% in Emerging Markets in general, with a reasonable proportion of that in China.
For a medium risk investor, a look at a regional fund such as First State Asia Pacific Leaders. This fund features around 35% investment in China, together with investment in other countries in the area, including Australasia.
A higher risk investor may wish to take a more country specific approach and for this I would perhaps look at First State Greater China which is more concentrated in the area, investing up to 50% in China itself and the rest mainly across Hong Kong, Taiwan, and Singapore.
Moneywise China Article – April 2010
We were recently approached to contribute to an article to be published in Moneywise magazine in May. Below are our thoughts:
Is there a bubble in China? Is it about to burst? Are fears that China is overheating exaggerated?
Below is a list of questions we want to answer for our readers:
With regard general thoughts on China there have been periods of speculation that China is forming a ‘bubble’; unfortunately only time will tell. There are certain country specific factors that make forecasting along the usual lines very difficult; perhaps most notably the level of Government intervention and control on matters such as the currency. Emerging Markets in general tend to be a relatively volatile area and will most likely continue to have periodic setbacks. However, just as characteristic at present are periods of significant growth. The long term story of development, consumerism, and growth remains convincing in my view. The key point here is that this is a long term view over 10, 20 years and beyond, I have no doubt that the short term picture will continue to be relatively turbulent at times.
Just as you have to be careful not to get too carried away with some of the more spectacular statistics claimed in respect of China’s future growth, it is also important in my view not to lose sight of the long term potential of the area.
Global markets seem more correlated than ever with the growth in international trade, and this was certainly the case to a great extent with the recent global recession. For example many multinational companies in the UK are now dependant to a greater or lesser extent upon profits from abroad, including Emerging Markets.
1. If you want to invest in China where should you start?
With developed markets and economies likely to be feeling the effects of the ‘credit crunch’ for some time to come, Emerging Markets are seen by many as the main source of growth for the future. This applies in particular to the UK which has been particularly affected by the global recession. Emerging Markets in general were seen as the long term providers of global GDP growth prior to the credit crunch – and this has only been exacerbated by the events of the past couple of years.
At the centre of this theme is the development of China which has experienced huge economic growth and development in recent years and continues to do so. Many people want to invest in this potential and benefit from this growth. In recent years much of China’s growth has been attributed to providing consumer goods to the West and developed economies. However, it is also worth bearing in mind its own internal development which has seen huge investment in infrastructure (roads, railways, airports etc…) and significant growth in consumerism.
It is worth taking financial advice upon the most suitable route to invest in China as Emerging Markets in general are a traditionally volatile & complex area. This may be directly or indirectly via Chinese companies, or via multinational companies who are partaking in the growth story.
2. What are the various ways you can invest in China?
As touched upon above you could consider direct investment into the area via company shares, although this would only really be recommended for highly experienced investors due to the specific risks of holding individual shares (i.e.: a lack of diversity). The most suitable route for most is via some sort of ‘collective’ investment such as a Unit Trust or OIEC. There is now a huge variety of choice from very specialist funds to more general global funds with exposure to the area.
3. What are the benefits/disadvantages of different ways of accessing China: (single country funds vs. regional funds, investment trust vs. unit trust vs. tracker fund?)
For most people these are decisions that should be made with an investment professional after assessment of your attitude to risk and objectives and taken in the context with the rest of your portfolio.
However, generally speaking, a single country fund will carry more risk and volatility as it is more sensitive to changes in that single economy. Factors such as political risk and even natural disasters then come more into focus. This is not a suitable risk for everyone. By investing in a well managed regional fund you are then accessing the fund manager’s expertise, the hope being that they will use their specialist knowledge of the area to manage the fund according to the prevailing conditions of that time. Likewise, many of the more successful global actively managed funds will carry a reasonably high exposure to the area.
In terms of tracker funds, these can be a very good route for people looking to benefit from the areas growth in general terms over the long term. They tend to offer reasonably low charges and can give a portfolio exposure to the region. The key questions here are:
• Which index is tracked?
• What is the tracking method?
• What is the tracking error?
• What are the costs charges?
With regard the Investment Trust vs Unit Trust question, there are certain features of investment trusts that make them a higher risk investment, relatively speaking. These include the fact that they can trade at a discount or a premium to net asset value (NAV) and also ‘gear’ (or borrow) – both of these factors can exaggerate gains or losses. Therefore, in what is already a relatively high risk area, Unit Trusts may be a more suitable route for many.
4. What percentage of someone’s portfolio should be invested in China depending on their risk profile? (low, medium, high)
Again, this question depends largely upon an individual’s existing portfolio and attitude to risk, and opinion will vary. The area may not be suitable for a low risk investor at all, or perhaps only via some managed exposure in a global fund. In terms of a medium and higher risk investor I would perhaps be looking at a maximum of 5% and 10% respectively. However, this should be combined with investment across other Emerging Markets and blended with the rest of their portfolio.
5. What three funds would you recommend to your clients (one for each risk category)?
For a low risk investor, if suitable at all (dependent upon the factors listed above), I would perhaps consider a holding in a global fund with a reasonable weighting in the area such as Neptune Global Equity. This fund holds around 45% in Emerging Markets in general, with a reasonable proportion of that in China.
For a medium risk investor, a look at a regional fund such as First State Asia Pacific Leaders. This fund features around 35% investment in China, together with investment in other countries in the area, including Australasia.
A higher risk investor may wish to take a more country specific approach and for this I would perhaps look at First State Greater China which is more concentrated in the area, investing up to 50% in China itself and the rest mainly across Hong Kong, Taiwan, and Singapore.