Mark Dampier: China's growth goals catch investors' eyes

 

Despite its strong rate of economic growth in recent years, China has been a disappointing place to invest. This can be explained, at least in part, by the dominance of state-owned enterprises (SOEs), which account for a large proportion of China's stock market indices.

In the past week I have spoken with Anthony Bolton in relation to Fidelity China Special Situations plc; and Phillip Ehrmann, the manager of the Jupiter China Fund. They agree the days of double-digit GDP growth in China are over. The government is pursuing a more balanced economic growth policy, realising it is quality, not quantity, that counts.

To achieve more sustainable economic growth the focus is shifting from low-value exports, high investment and infrastructure spending; to value-added manufacturing, domestic consumption and a services-based economy. As part of this transition, SOEs are likely to be a less dominant force. In the new economic order smaller, privately owned companies should be able to take advantage of deregulation and reform, freer movement of capital, anti-corruption policies and the evolution of online retailing across China.

Both Messrs Bolton and Ehrmann have tended to focus more on higher-risk smaller and medium-sized companies. They have been early with their move into this type of company and as a result both managers have had a tough time.

These types of company can languish as big international investors tend to focus on the larger companies in an index, while overlooking smaller counterparts which can be harder to buy and sell quickly in large volumes. This is another area which might improve with China's ongoing development. As more domestic investors save for the future and participate more in the financial markets, more interest should be paid to smaller and medium-sized companies.

The economic reforms currently being enacted are all part of the Chinese government's five-year plan. There has been some disillusionment over the speed with which the government is achieving its stated aims. It is important to remember the transition from export-driven to consumption-driven economy will not happen overnight, or even in five years. It is a multi-year theme that will have setbacks along the way. The main thing is the transition has begun.

Healthcare is one area in which changes are likely to be seen, according to Messrs Bolton Ehrmann. Sales in the pharmaceutical industry are expected to grow at an annualised rate of 22 per cent over the next two to three years, driven mainly by rapidly rising income. Healthcare and pharmaceutical companies account for only around 1 per cent of the Chinese stock market by market capitalisation. If growth hits the levels being predicted, it would not be far-fetched to envisage healthcare and pharmaceutical companies accounting for a much bigger proportion of the market.

One area Messrs Bolton and Ehrmann have avoided is the banking sector, which is getting considerable publicity, particularly the shadow banking sector where there has probably been large misallocation of capital. That said, while non-performing loans are extremely low in the banks, making valuations look attractive, the underwriting quality of these loans is yet to be tested.

Messrs Bolton and Ehrmann tend to look for strong management teams with shareholders' interests at heart. They also look for businesses with good long-term growth prospects and strong cash generation.

While there are similar themes running through the funds and both have a bias towards smaller and medium-sized companies, they are different portfolios and will perform differently. Fidelity China Special Situations is also a closed-ended investment trust with a high level of gearing, so will only suit investors prepared to accept the additional risk and volatility this brings. Mr Bolton is also due to step down at the end of March 2014 and this must be taken into account. For investors who accept these risks it could look attractive on a discount of around 7 per cent.

The story in China is one of gradual change. As more people became disillusioned with China, investment valuations have fallen. Both funds have seen an improvement in performance over the past year as small and medium-sized companies have begun to perform better. For investors seeking a single-country Asian fund, drip-feeding into China at the current low valuations could prove more profitable in the coming years than it has over the last few years. Whether investors can be patient enough is another question.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Recruitment Genius: Experienced Financial Advisers and Paraplanners

    Negotiable: Recruitment Genius: This extremely successful and well-established...

    Guru Careers: FX Trader / Risk Manager

    Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

    Day In a Page

    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map
    Lionel, Patti, Burt and The Who rock Glasto

    Lionel, Patti, Burt and The Who rock Glasto

    This was the year of 24-carat Golden Oldies
    Paris Fashion Week

    Paris Fashion Week

    Thom Browne's scarecrows offer a rare beacon in commercial offerings
    A year of the caliphate:

    Isis, a year of the caliphate

    Who can defeat the so-called 'Islamic State' – and how?
    Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

    Marks and Spencer

    Can a new team of designers put the spark back into the high-street brand?
    'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

    'We haven't invaded France'

    Italy's Prime Minister 'reclaims' Europe's highest peak
    Isis in Kobani: Why we ignore the worst of the massacres

    Why do we ignore the worst of the massacres?

    The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
    7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

    Remembering 7/7 ten years on

    Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
    Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

    They’re here to help

    We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
    Time to lay these myths about the Deep South to rest

    Time to lay these myths about the Deep South to rest

    'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
    What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

    What exactly does 'one' mean?

    Court of Appeal passes judgement on thorny mathematical issue