You can be a winner, whatever the result of America v China
While watching the battle for gold medals or to be the world's top economy, investors don't need to take sides. Emma Dunkley reports
Sunday 12 August 2012
China and the US have been vying with each other for top dog status at the London Olympics mirroring the battle going on in the world economy. Despite China's rapid economic rise and bright long-term prospects in the global arena, many investors shy away from the emerging market, instead putting their money in the US and other developed regions.
But now is the time to ask if you should be paying more attention to the country set to get the most gold medals in the future, rather than pinning your hopes on second place?
"US is currently the biggest economy in the world – but do I want to build an investment portfolio based on the rear-view mirror? No," says Oliver Gregson at Barclays. "Will the US have the same level of growth in equity markets? No. Emerging markets will be the best area for growth over the long-term. Emerging markets will represent the lion's share of global growth going forward."
Investors have tended to hold more of their money in US stocks and shares, says Mr Gregson, but given the growth prospects for China, you could substantially increase your investments in the emerging markets, even if it means a bumpy ride along the way. "Investors could look to have around 10 per cent of their portfolio in emerging market equities for long-term investment," he adds.
As China's prominence increases, with estimates it will contribute to 11 per cent of world GDP this year alone, you may want to capture the country's growth before it reaches the finish line, although it could be more akin to a marathon than a sprint.
"Most people are under-represented in this region because they are unfamiliar with it," says Russ Koesterich, the global chief investment strategist at iShares. "As emerging markets form a larger part of the global economy, it's reasonable people want to own more of it. But even if everything goes right with China, it's likely to be volatile."
Although they may sit next to each other at atop the medal table, China and the US are leagues apart when it comes to investing. "These are two very different beasts, although they are the two biggest economies in the world," says Darius McDermott, the managing director at Chelsea Financial Services. "The US is a more developed market, and focuses more on corporate governance. China, on the other hand, has greater growth potential in terms of GDP, but there are far more risks involved."
Despite the appeal of putting your money in China for the future, there are significant risks involved. "China is, effectively, still a Communist state," says Caroline Shaw of wealth manager Courtiers. "The US has always been freely capitalist. Also, how much do we know about Chinese companies? In comparison, we know lots about Apple and Exxon, for example."
Having information on a company when investing is vital and it's hard to find on Chinese firms, adds Ms Shaw. "I'd pick the US over China, due to transparency. I know what these companies do, as there's available data in the US," she says.
It would also be wrong to assume that just because China's growth is set to soar, its stock market will follow. Last year, funds investing in China were down 21.9 per cent on average, despite the country's GDP growth of around 9 per cent. In comparison, funds investing in North American companies were down 1.9 per cent on average.
"Some of the worst performing funds investing in China were down 30 per cent," says Gary Potter, a fund of funds manager at Thames River. "Just because China is growing from an economic perspective, and is seen as the engine of global growth, it does not often translate to stock market returns."
Even recognising that gap, you do not need a China-specific fund. "There are many ways to tap China's growth profile – you could find an investment where, as China grows, you have more weighting to the country and Asia Pacific," says Mr Potter. "People don't have to consciously say 'we must have more in China'."
Rather counter-intuitively, buying Chinese equities is arguably not the best way to go about accessing China. "There are plenty of companies around the world to access this – you don't need a China fund," says Mr Potter. "You want to diversify into high quality, large international businesses, which are exposed to the Chinese growth story."
Mr Potter says the JP Morgan Global Consumer Trends fund, for example, invests in branded companies with exposure to consumers in China. "Companies like Burberry, Johnson & Johnson – these are global businesses accessing the China story," he adds.
On the other hand, you might err towards the US which is still an attractive investment, as the world's largest economy, that is robust in comparison with China, with strong demographics and many global-reaching blue chip companies. "The US is more attractive, no question," says Ms Shaw at Courtiers. "It does have some issues coming up, with the election and fiscal cliff at the start of next year, but these are known."
But while there can only be one winner in the Olympics, you can have more than one in your investment portfolio, and a certain amount of exposure to the US and China over the long-term would be wise.
"If you are a very low risk investor, you don't want too much exposure to China, because it is volatile," says Mr McDermott. "If you are more balanced, then 15 per cent or 20 per cent in the US and around 5 per cent in China. And if you are younger, with a bigger risk appetite, have a greater allocation of up to around 20 per cent to emerging markets."
When it comes to investing in the US, the market is very efficient and active managers have a tough time picking stocks that beat it, although there are some who have achieved this outperformance in certain years.
Ian Aylward, a fund manager at Aviva Investors, says index tracker funds or exchange traded funds (ETFs) are a better way to invest in the US, although he believes in active management in the main. "One region where we struggle to find a manager who can outperform the market is in large cap US equities," says Mr Aylward. "We'd rather hold a tracker there, and it's very cheap."
The Royal London US Tracker fund, for example, has an annual management charge of 0.20 per cent and aims to follow the return of a broad US market. There is also a wide choice of low-cost ETFs that invest in the S&P 500 market, such as the iShares S&P 500, with a total cost of 0.40 per cent a year.
In contrast, the Chinese market is opaque and no way near as efficient. Mr McDermott says you should opt for an actively managed fund when investing in the country, recommending First State China Growth or one of Aberdeen's China funds.
"The majority of investors, though, should go for the broader Asia and emerging markets funds," says Mr McDermott. "These managers are keen on corporate governance, the quality of businesses, good balance sheets and buying at reasonable value."
Emma Dunkley is a reporter for citywire.co.uk
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