Investing in China funds

aroominyork

I usually run an eye over Ian Cowie’s weekly Sunday Times article but it has never contained anything that has influenced how I invest. But I was interested in this week’s article on why he has sold his funds which wholly or largely invest in China. He wrote:

“Over the medium to long term, it seems likely we have seen the high water mark of globalisation, and the trend in the future will be for more goods and services to be sourced closer to consumers and for fewer to come from far away. Supporters of this switch range from right-wing nationalists to left-wing environmentalists; both will hurt global trade in general and emerging markets in particular.

Most immediately, and whatever the rights and wrongs, I fear we may be entering the finger-pointing stage of the coronavirus crisis — and that this will be bad for China.

Last Sunday, the American president said China should face consequences if it was “knowingly responsible” for the Covid-19 pandemic. Donald Trump explained: “It could have been stopped in China before it started and it wasn’t, and the whole world is suffering because of it.

“If it was a mistake, a mistake is a mistake. But if they were knowingly responsible, then sure there should be consequences.”

Bear in mind that American compensation culture scarcely recognises the concept of a fault-free accident where no one is to blame or liable to write a large cheque. Now remember that Trump had pledged to win a trade war with China before peace broke out last year.

Looking forward, he has an election to try to win on November 3, against a backdrop of soaring unemployment. All things considered, I expect Trump to announce something dramatic soon — and it won’t be good news for China or companies heavily invested there.”

There was then a section about a possible international class action against China.

I’ve long been conscious that having just 2%-3% of my equity funds in China is underweight for such a large player and I have been toying with moving some emerging market investments into a China fund. This makes me pause for thought.

I think Cowie makes a good case for a short-term Trumpian response. However I’m not convinced that the West is going to move any significant manufacturing capacity closer to home. What do others think?

Shedman

I can see companies that outsource to China etc building bigger contingency stockpiles but moving manufacture back has a much longer timescale, if indeed feasible given lack of infrastructure, planning constraints, loss of the required skills etc (let alone the increase in costs), so I reckon regardless of 'blame' China and Far East is likely to continue to do OK for a few years yet.

MaxiRobriguez

I'm overweight China, and I don't see their future as manufacturing so I'm not too fussed about peak globalisation being a risk for my Chinese funds. Furthermore, population demographics are in their favour - only 10% over 65, compared to much higher figures in Western world, and debt to GDP levels are lower than Western world as well. 

Fundamentally though they, like the rest of Asia, has a culture which celebrates hard work and educational achievement whereas Europe and the US is shunning those things more and more for conspiracy theory and laziness. 

It's only a matter of time before the balance of power shifts to Asia. 

Albermarle

A lot of low cost manufacturing has moved away from China to cheaper countries , like Vietnam .
For higher end stuff , there could be a small move back to manufacturing in the West as the cost differences are not that great anymore. There was a slow drift in this direction even before the pandemic. However it will be confined to certain types of products and a wholesale move back seems pretty unlikely.

YellowStarling

MaxiRobriguez said:

I'm overweight China, and I don't see their future as manufacturing so I'm not too fussed about peak globalisation being a risk for my Chinese funds. Furthermore, population demographics are in their favour - only 10% over 65, compared to much higher figures in Western world, and debt to GDP levels are lower than Western world as well. 
...
It's only a matter of time before the balance of power shifts to Asia. 

This.  I'm overweight in China, India, Indonesia, S Korea, Asia generally, and pockets of Africa v. long term for much of the same reasons - hoping to ride the combined waves of demographics and developing consumerism/wealth per capita.

MaxiRobriguez

YellowStarling said:

MaxiRobriguez said:

I'm overweight China, and I don't see their future as manufacturing so I'm not too fussed about peak globalisation being a risk for my Chinese funds. Furthermore, population demographics are in their favour - only 10% over 65, compared to much higher figures in Western world, and debt to GDP levels are lower than Western world as well. 
...
It's only a matter of time before the balance of power shifts to Asia. 

This.  I'm overweight in China, India, Indonesia, S Korea, Asia generally, and pockets of Africa v. long term for much of the same reasons - hoping to ride the combined waves of demographics and developing consumerism/wealth per capita.

Whilst I'm overweight China, should probably point out I don't think it's a certainty that the investment will pay off.
I'm overweight because I *think* it's sensible as per above, and because their equity markets don't reflect the proportion of global wealth (primarily because equity investing isn't a big thing in China yet), so a shift in sentiment amongst the Chinese people towards equity ownership should theoretically be a tailwind for equities. 

My overweighting to Asia only goes as far as having same % allocation to it as my US funds. 

aroominyork

MaxiRobriguez said:

I'm overweight China, and I don't see their future as manufacturing so I'm not too fussed about peak globalisation being a risk for my Chinese funds. Furthermore, population demographics are in their favour - only 10% over 65, compared to much higher figures in Western world, and debt to GDP levels are lower than Western world as well. 

The manufacturing vs. demographics issue is interesting. I have been looking at two funds, Invesco China Equity and First State Greater China Growth. The first is a bit more skewed towards domestic consumption, the latter towards manufacturing. The Invesco fund has a nice balance but I've been very impressed by a couple of online interviews with Martin Lau who manages the First State fund. Decisions decisions...

Edit: I've just looked on Trustnet at China funds' performance over the last three months. Leading the way by a country mile is Matthews China Small Companies up 22.5%, with the second placed fund up 6%. I've not dug into the individual holdings but I guess that says something about domestically-focused stocks being in favour. The First State fund mentioned above is one off the bottom - does that mean it's cheap? (Rhetorical question.)

Thrugelmir

When Chinese companies are at the beck and call of the Government there's a nagging concern that international shareholders interests aren't a priority. In addition the State has signficant holdings in all the major listed companies. As long as the US and China remain in a trade war. Personally I'll remain wary. The Chinese aren't afraid of the big bad wolf. 

aroominyork

Thrugelmir said:

When Chinese companies are at the beck and call of the Government there's a nagging concern that international shareholders interests aren't a priority. In addition the State has signficant holdings in all the major listed companies. As long as the US and China remain in a trade war. Personally I'll remain wary. The Chinese aren't afraid of the big bad wolf. 

But surely that comes down to stockpicking companies with good governance. That reduces the size of the pond you can fish in but it doesn't mean the pond is dry.

Thrugelmir

aroominyork said:

Thrugelmir said:

When Chinese companies are at the beck and call of the Government there's a nagging concern that international shareholders interests aren't a priority. In addition the State has signficant holdings in all the major listed companies. As long as the US and China remain in a trade war. Personally I'll remain wary. The Chinese aren't afraid of the big bad wolf. 

But surely that comes down to stockpicking companies with good governance. That reduces the size of the pond you can fish in but it doesn't mean the pond is dry.

Board directors can equally be party officials. There's no dividing line. Nor would you actually know. The party's influence on companies is explicit. A one party state has a different model of capitalism to the Western world. 

aroominyork

No, I probably wouldn’t know! But fund managers with a focus on and deep experience in governance issues would know what they are looking for. I have funded – through NGO routes – health facilities in Zimbabwe where there are known to be government informants. That doesn’t mean I would not fund them – it means understanding the situation on the ground and doing an appropriate risk assessment.