Is China a bargain or a bubble?
The country's economy is growing rapidly, which is good and bad news. Simon Read reports
Sunday 14 November 2010
David Cameron's jaunt to China last week came amid fears that the region could turn out to be a huge bubble.
The Prime Minister led the Government's largest delegation to China, with five cabinet ministers and 50 British business people aiming to forge closer links with the world's fastest-growing economy.
Investors have been backing China's growth for some time, and popular sentiment peaked in April when fund management firm Fidelity launched Anthony Bolton's China Special Situations fund to huge investor interest. Demand has been so strong that the firm plans to issue more shares in the investment trust in January.
Since launching seven months ago, the share has increased from its issue price of 100p to 128.7p last week. But more interesting than this is the fact that by 8 November, shares were trading at a premium to the net asset value (NAV) of 9.67 per cent. It is partly for this reason that new shares in the trust will be issued, which should bring down that premium.
When investment trusts trade at a premium to the NAV it means that anyone buying shares is paying more than the value of the underlying investments. The fact that investors are apparently queuing up to buy into China Special Situations shows how popular the country remains.
But buying into the Fidelity fund now could be a mistake, warns Stuart Fowler, the director of investment at wealth manager No Monkey Business. "If valuations count more than the story, investors are likely to be disappointed, even if the economy itself avoids implosion and companies achieve the growth rates that are expected," he says. "We are seeing a diluted version of the situation back in 2007, when the Chinese market was priced at about six times the book value of its listed companies. But that is also why the market is still nearly 40 per cent below the 2007 peak.
"That it is up about 130 per cent since the bear market low does not conceal the reality that, in stock market terms, China has already imploded. Rational valuations are sitting like a dead weight on the hopes of a still-growing band of retail investors around the world who believe the China growth story."
David Coombs, the head of multi-asset investments at Rathbone Unit Trust Management, warns that Western money is being sucked in and not necessarily finding a smart home.
"Investors are increasingly looking East for growth on the promise of super-normal returns, but there are many 'tank traps' awaiting them, dangers that the numbers simply cannot and do not reflect," Coombs warns.
"With global economies looking vulnerable, this is no time to take unnecessary risks with capital for a short-term win. Investors could be facing serious potential losses if they don't take a more measured approach."
A measured approach means taking a longer-term view on the region. China's growth and re-emergence as a major world economic force certainly back up its global importance. While China contributed only 3.7 per cent to the global economy in 2000, it is forecast by the International Monetary Fund to account for 11.1 per cent of world output in 2014.
It overtook Germany to become the world's third largest economy behind the US and Japan in early 2009, and this August overtook Japan. The London Business School predicts it will pass the US by 2020 and Goldman Sachs forecasts it will be the world's largest economy by 2027.
"There is a strong case for investment in China over the long term," says Darius McDermott, managing director of Chelsea Financial Services. "The shift from West to East is undeniable, and I believe foreign investment and a growing middle class will continue to power growth.
"Also, it is clear that the majority of UK investors are underweight in China and other emerging markets. While emerging markets have a global market capitalisation of 16 per cent, Investment Management Association data revealed that UK investors allocate just 1.9 per cent of their total portfolio to these markets. A medium-risk investor should have at least 5 per cent."
Jason Pidcock, manager of the Newton Asian Income fund, agrees that China has long-term potential. "Globalisation is helping China to create a large affluent class with significant buying power," he says. "The world, having already reaped the rewards of China's productive power over the past decade, will now begin to feel the force of its consumptive power."
But a more pressing issue for China is its currency. The country is trying to turn the yuan into an international currency to reduce its reliance on the US dollar, euro and yen and to encourage other countries to use it as a reserve currency.
But the move could have huge implications for investing in Chinese equities, says Stephen Ma, the manager of Fidelity's China Opportunities fund. "Chinese companies deriving their earnings from Chinese domestic consumption and those industries reporting earnings in foreign currencies are likely to be beneficiaries," he says. "Chinese end-consumers will also be beneficiaries, as will those companies importing goods from outside China."
He pinpoints financial companies, casinos and cars as sectors set to benefit from the yuan gaining in status. But as David Kuo points out below, it may not just be Chinese companies that will benefit. You could gain from China's potential growth by investing in global funds or shares in UK firms.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
- 2 Christians: The world's most persecuted people
- 3 The secret report that helps Israelis to hide facts
- 4 Danish TV reporter is all business up top, all party down below
- 5 Denmark bans kosher and halal slaughter as minister says ‘animal rights come before religion’
The secret report that helps Israelis to hide facts
A day in the life of Vladimir Putin: The dictator in his labyrinth
A new Russian revolution: The cracks are starting to appear in Putin’s Kremlin power bloc
Were 'Poor Doors' added to mixed developments so wealthy residents don't have to go in alongside social housing tenants?
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Opponents of Israel's military operation in Gaza are the real enemies of Middle Eastern peace
iJobs Money & Business
Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)
£350 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...
£500 - £560 per day: Orgtel: Java Developer FX - Banking - London - Up to £560...
£350 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...
£26000 - £30000 per annum + Benefits: Ashdown Group: Account Manager - (Produc...
Day In a Page
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000