China has been one of the best-performing global stock markets in 2020 as its economy has rebounded quickly from the coronavirus shutdown. Funds with a China focus have been at the top of the leaderboard for much of the year, while star companies like Tencent and Alibaba have surged, even despite the recent change in sentiment towards tech stocks.
But plenty of questions remain about just how sustainable China's recovery is. We look at the risks and opportunities for investors in the China growth story.
Covid-19 has undoubtedly heightened tensions between the US and China, but the possibility of a new President in the White House has given global investors hope of a change in tone from Washington.
A Democrat victory next month could bring about a thawing in relations between the two countries, argues Professor Keyu Jin of the London School of Economics. “Biden will turn the heat down,” she says. But there will always be tension between the China and the US due to the size and importance of their economies on the world stage, she adds: “In the long run it’s going to be a trial of strength”.
Andy Rothman, investment strategist at Matthews Asia, thinks a Biden administration would bring a different approach to US-China relations, but not necessarily a softer one. If Trump is re-elected, however, there could still be a reset in the relationship between the two nations to levels of engagement seen before the Covid-19 outbreak, he adds.
Asian Power Bloc
Does China still need the US economically? “Despite the current tensions, the Chinese economy hasn’t really suffered very much,” says Rothman, who notes that the services sector is now the biggest part of China’s economy, with domestic demand taking up the slack from lower global trade.
Paras Anand, chief investment officer, Asia Pacific, at Fidelity, believes that coronavirus crisis has accelerated the trend towards the “Asianisation of Asia”, with China as the hub of a growing regional network which takes in countries like Vietnam, Taiwan and South Korea.
The decision by the owners of Ant Group to float in Shanghai and Hong Kong rather than New York is one example of the growing confidence in Chinese entrepreneurs to float locally, Anand adds. The float, which is due later this year, is set to become the largest IPO in the world to date. China's inclusion in the FTSE Russell World Government Bond index is another key marker for the country's progress, says Matthews Asia portfolio manager Teresa Kong, particularly as it's being added as a "developed" market (in equity indices it's still listed as an emerging market).
The clash between the US and China over video messaging service TikTok and Huawei highlights the importance of technology in the trade war. We have recently looked at opportunities in Chinese technology stocks away from the highly valued names like Alibaba (BABA) and Tencent (00700). For example, Trip.com (TCOM), China’s largest online travel agency, is taking advantage of the rebound in domestic travel in the country following the easing of restrictions. The company has a four-star rating, which means analysts think it is undervalued.
Dale Nicholls, manager of Bronze-rated Fidelity China Special Situations (FCSS), is keen on some of China’s unlisted companies in the tech space, for example taxi business Didi, which has a 90% market share after buying out Uber in China. Nicholls says companies are often coming to market later, with investor interest focusing on the pre-IPO stage. “Over the years, the unlisted space in China has deepened, and while still not as developed as in Western markets, it does offer plenty of interesting opportunities for the patient, long-term investor,” he says.
What are the risks to the recovery in China? In the short term, despite the Chinese economy re-opening Nicholls says “it pays to be wary”, particularly of cyclical companies. He fears a global downturn could derail China’s rebound from the events of this year. But there seems to be little sign of a slowdown in evidence so far. Silver-rated JP Morgan China Growth & Income (JCGI), for example, is up over 50%, making it the second highest performer among investment trusts rated by Morningstar. And First State Greater China Growth, the only open-ended China fund with a Gold Morningstar Analyst Rating, is up nearly 15% year to date.