Powerhouse China can charm investors in the year of the snake

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Tomorrow China celebrates its new year. The fireworks and carnival atmosphere will inaugurate the year of the snake.

China is now the world’s second largest economy after the US. Unlike the UK which shows nil growth, forecasters expect China to deliver seven to eight per cent, which suggests almost every portfolio here should contain an element.

Whilst such growth is a step down from the high rates witnessed in the last decade, it will still be a pretty impressive performance. This should provide a reasonably benign environment for the country’s new leadership to find its feet.

The level of investment should depend both on the length of time considered and on attitude to risk. As an emerging market star, China would be a good choice for a child’s savings or for a pension which does not need to be taken for 10-15 years.

Ian Hargreaves, manager of Invesco’s Asia Investment Trust, says: “Valuations in the region look reasonable and, if anything, are below long term averages.”

Beijing has boosted the economy with infrastructure expenditure and a pro-trade policy. Martin Payne, Leeds director of stockbrokers Brewin Dolphin, sounds a note of caution: “It is possible momentum could falter towards the end of this year unless policymakers introduce further stimulus.”

He says the state’s infrastructure help has tended to benefit larger companies over smaller which “remain more downbeat and private sector investment has yet to pick up”.

Payne tips two funds: First State China Growth, which is large with £2.6bn capitalisation, and JP Morgan Chinese Investment Trust, which was the first to invest solely in ‘Greater China’ (China, Hong Kong and Taiwan).

The former looks for firms with management incentives, franchise strength and long-term growth prospects. It buys across the different Chinese exchanges and maintains 40-50 stocks. The latter was launched in 1993 and has attracted £143m with no borrowing.

It is on a nine per cent discount which means savers now are buying cheap assets. The annual management fee is a competitive one per cent.

Looking at performance of mutual funds and investment trusts in China over the last three years, research by Lipper specially for the Yorkshire Post reveals the top performers:

n First State Greater China Growth ‘A’, up 29.4 per cent;

n Aberdeen Global Chinese Equity, up 29 per cent;

n Skandia Greater China Equity, up 16.3 per cent;

n Neptune Greater China Income, up 14.1 per cent.

The growth by the leading funds over five years was even more impressive: GAM Star China Equity (in US$) up 72.9 per cent, First State Greater China Growth ‘A’ up 49 per cent, Threadneedle Greater China Equities up 32.1 per cent and Aberdeen Global Chinese Equity up 32.1 per cent.

For consistently under-performing, Best Invest name Jupiter China, F&C Pacific Growth, Marlborough Far East Growth and Baillie Gifford Greater China.

Chinese investments can be quite volatile. Last year it recorded the worst performance of all investment sectors, down 22 per cent. The much hyped Fidelity China Special Situations Investment Trust was even further adrift.

Global issues in Europe and the US proved to be a drag on Chinese shares but now there is a new optimism. “There is undoubtedly huge investment potential in China. It is only a matter of time before it overtakes the US to become the largest economy in the world,” says Elizabeth Hastings of financial advisers AWD Chase de Vere in Leeds.

Hastings says most savers should not take the risk of specific exposure to China for more than a small proportion of their portfolios and invest instead through broad-based emerging market funds.

Many will have a significant weighting in China.

She likes JP Morgan Emerging Markets (with 22 per cent in China) and Schroder Global Emerging Markets (18 per cent in China).

For the minority taking the single country route, Hastings likes Invesco Perpetual’s Hong Kong and China Fund.

If looking for income, consider Chinese bonds. One access route is Baring’s China Bond Fund which should benefit from the gradual appreciation of the Chinese Renminbi. The currency remains undervalued in Baring’s view.

With a growing middle class, China is now being thought of as a market to which large companies can sell their products rather than as a country to which parts of the production line are outsourced.

This trend has already been seen with some American firms whilst Chinese ones, like Lenovo, are moving away from China.

The political risk of investing in China should not be underestimated. The violent demonstrations in Tiananmen Square may date back to 1989 but a more educated and powerful middle class will demand democracy whilst its leaders could impose a high tax on foreign investments.

Corruption and inflation are two issues that still need to be tackled.

Jonathan Baker, of stockbrokers Charles Stanley in Leeds, likes three funds: Scottish Oriental Smaller Companies, Edinburgh Dragon and Aberdeen Asian Income.

As an alternative to investing through a traditional collective, Baker says good diversification to the Asian market can be obtained through ishares Asia Pacific Exchange Traded Fund. This is also a low cost way to invest in the region.

Savers here can buy individual shares on one of the Chinese exchanges but should be aware of the costs involved. The dealing commission with Brewin Dolphin is 1.5 per cent on the first £15,000 and one per cent on the next £15,000, plus a bargain fee of £20 per trade in Hong Kong and £250 plus VAT quarterly for a nominee account.

Hong Kong shares would cost 1.85 per cent commission (minimum £75) plus £10 transaction charge with Charles Stanley. There would also be a £30 custody fee per security each year.

A good barometer of sentiment is the Hang Seng share price index.

It is based on the largest 48 companies quoted on the Hong Kong exchange and represents 60 per cent of its value. Established in 1969, even over the last 12 months, it has oscillated between 18,185-23,659.

Chinese shares are cheap. “Even if you exclude Chinese banks – which are really cheap but no one wants to own – the market is still at a substantial discount to its long-term history and well below the five-year average,” says Chelsea Financial, noted private client advisers.

The firm adds that the new leaders need to concentrate on clearing away the debt and move to a consumer-driven market.

“Now is a good entry point for long term investors in China and very well may be a good investment for the short term.”