February 5, marks the start of the Chinese New Year – Year of the Pig.

So how are China-focused fund managers viewing the threat of trade wars, the current state of the Chinese economy and the prospects for their investments? The Association of Investment Companies (AIC) has gathered comments from managers with significant proportions of their portfolios in the region.

Trade wars damaging but opportunities arise

Schroder Asian Total Return

Robin Parbrook, fund manager of Schroder Asian Total Return said: “We remain sceptical of any real let-up in US and China tensions despite Trump’s suggestions that a deal will be completed. As highlighted several times last year, it is clear that US-China tensions are not just about trade, but something much bigger. It involves US perceptions around China’s intellectual property theft, cybercrime, the way China projects its political and financial power via One Belt One Road and China’s desire to dominate key industries via massive state subsidies through Made in China 2025.”

JPMorgan Chinese

Howard Wang, fund manager of JPMorgan Chinese said: “We believe we should see a resolution on tariffs as it is in the interest of both parties. However, the political dimension means we do not have strong conviction. We do think that domestic Chinese equities have discounted a very pessimistic outcome: both a trade war and growth slowdown. Consequently, we are beginning to see value in several areas of the A-share market. Whatever the outcome of current negotiations we believe China and the US will increasingly compete in areas of technological innovation from electric vehicles to artificial intelligence.”

TABLE: Investment companies with highest exposure to China, Hong Kong and Taiwan

Fidelity China Special Situations

Dale Nicholls, portfolio manager of Fidelity China Special Situations said: “While Chinese exports to the US as a proportion of their total exports globally have been falling for years as China has expanded its global reach and trading partners, increased tariffs will impact the export sector. Of greater concern is the broader impact on general sentiment and the prospect of delayed investment by Chinese companies in general. Despite the rumoured prospect of new trade concessions and a possible ceasefire between the two nations, we remain vigilant.”

Chinese growth slowing but expected

Dale Nicholls, portfolio manager of Fidelity China Special Situations said: “China is facing a slowdown, but this is already well documented and the growth rates in China remain the envy of most economies. The authorities’ focus on deleverage has been the main catalyst for a slowdown as this has impacted access to funding and subsequently impacted business and consumer confidence. There has been a slowdown in the rate of growth of consumption, particularly in larger durable goods such as cars. This has not been helped by falling markets and the sense that house prices have peaked. However, retail sales are still showing high single digit year-on-year growth despite the decline in car sales and, even with a general economic slowdown, the medium-term prospects for earnings growth remain strong.”

Henderson Far East Income

Mike Kerley, fund manager of Henderson Far East Income said: “Chinese growth is slowing although not by more than we would have expected. The rising base ensures that the growth of the past cannot be repeated, while the reforms of state-owned enterprises and the clampdown on non-bank credit will put pressure on growth in the short to medium term. These headwinds are being offset by measures to promote consumer spending and by tax cuts to corporates and individuals. This should be seen as a positive as the government pursues a policy of sustainability, rather than the old model of pump priming through debt-funded investment. Ultimately, the quantity of growth may slow but the quality will improve.”

Market turbulence producing opportunities

Suresh Withana, managing partner of Harmony Capital, the investment manager of Adamas Finance Asia said: “2018 was a volatile year for Asian equity markets. However, we continue to see abundant investment opportunities in China and throughout the wider region, particularly in financing companies in the SME sector where there is a significant shortfall of fresh capital available to quality businesses.
“A key regional investment theme that we expect to continue in 2019 is the rise of an increasingly aspirational consumer culture and this should provide increasing SME investment opportunities in healthcare, tourism, consumer and retail businesses and education.”

The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs.

The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 354 members and the industry has total assets of approximately £178 billion.

Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision.

Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.