How to ride the China stimulus wave

In my newsletter titled "Will it finally be the year of the dragon?" I explained that at the end of September, China's central bank (the People’s Bank of China) unveiled its biggest stimulus package since the pandemic in a bid to combat deflation and drive economic growth. Chinese stocks exploded higher as shown by the chart below, which is an updated version of the one included in the aforementioned newsletter.

In the same newsletter I highlighted how one investment bank believed there was another 10% upside for the CSI 300 Index in the short term. Funnily enough, the CSI 300 rallied another 8% the very next day. Nonetheless, there will be investors who will still want to gain exposure to the new "China stimulus trade".

One obvious way is to invest in one of the 10 unit trusts within the China/Greater China unit trust sector. The table below shows the performance of each of these funds since the start of the rally in Chinese equities. Unsurprisingly, one of these funds has entered this month's BOTB, namely Baillie Gifford China.

Fund	% return 30th September to 3rd October
Baillie Gifford China	35.04
Fidelity China	31.99
Liontrust China	29.69
FSSA All China	27.82
M&G China	27.58
Invesco China Equity (UK)	25.16
Allianz China A-Shares Equity	23.19
Janus Henderson China Opportunities	23.01
FSSA Greater China Growth	19.92
Jupiter China	16.01

But there are risks with investing directly into Chinese equities, given the level of volatility and the parabolic nature of the move we've seen over the last week.

However, there are less risky and more diversified ways to gain exposure to the Chinese stimulus trade. One way is to invest via an emerging market unit trust, which has exposure to some Chinese equities. Alternatively you can invest via an Asian equity unit trust that has benefited from the announcement of stimulus measures.

In the above chart you can see a red circle which shows the short-term boost the CSI 300 enjoyed after the announcement of similar, albeit smaller and more short-term, stimulus measures from the People’s Bank of China in February this year. This, combined with the latest rally, provides two performance periods which we can use to identify funds that benefited from the announcement of Chinese stimulus measures. By identifying those funds that have outperformed their peers during both periods you can use the information to gain diversified exposure to the China stimulus trade, via Asian and emerging market funds. But not only that you can use the insights to gain indirect exposure to China via European equity funds. You can even take it one stage further and identify individual European company stocks that could benefit most from a Chinese economic recovery that are heavily reliant on Chinese consumers, particularly the affluent middle class.

Chinese stimulus heatmaps

I analysed the performance of funds from the Global Emerging Market, Asia Equity ex Japan and European equity sectors, versus their sector peers, over the following time periods:

• 2nd February 2024 to 9th February 2024
• 23rd September 2024 to 30th September 2024

In doing so I was then able to produce 3 heatmaps, one for each sector.

How to use the heatmaps

The heatmaps (click on each image to open) show the relative performance of each fund versus their sector average in each time period. Each time period is colour coded with the top performing fund coloured dark-red. The worst performing fund over the time period is coloured dark-blue with a sliding scale between the two as shown below:

If a fund is coloured dark-red over both time periods it would suggest that the fund would benefit from Chinese stimulus measures. Conversely if they are coloured dark-blue over both time periods then it is unlikely that the fund would benefit from a Chinese economic recovery.

Below each table you will find the highest, lowest and average performance of the funds listed in the given time period.

Global Emerging Markets

Those Global Emerging Market funds that have performed the best during the stated time periods tend to be those with the highest direct Chinese equity exposure.

 

Asian Pacific excluding Japan

 

Europe excluding UK

 

The European companies that could benefit from a Chinese recovery

By analysing the top 10 holdings of the top performing European equity funds it is possible to identify those companies that appear most frequently. This list below includes 10 companies frequently found in the top 10 holdings of European ex-UK unit trusts which have benefited from China's recent stimulus measures. Under each company I have provided a brief synopsis of what they do as well as how they might benefit from the China stimulus measures.

1. Novo Nordisk
   • Industry: Healthcare
   • Description: Specialises in diabetes care and obesity treatments.
   • Benefit from China stimulus: Increased healthcare demand in China, especially for chronic diseases, boosts Novo Nordisk's revenues.
2. ASML Holding
   • Industry: Technology (Semiconductors)
   • Description: Leading provider of advanced semiconductor manufacturing equipment.
   • Benefit from China stimulus: China's investment in semiconductor technology increases demand for ASML's products.
3. LVMH (Moet Hennessy Louis Vuitton)
   • Industry: Luxury Goods
   • Description: World leader in luxury goods, owning brands like Louis Vuitton and Dior.
   • Benefit from China stimulus: Higher consumer spending in China on luxury goods due to increased liquidity and economic confidence.
4. Nestlé
   • Industry: Consumer Goods
   • Description: The largest global food and beverage company.
   • Benefit from China stimulus: Rising demand for premium food and beverage products in China as disposable incomes grow.
5. Schneider Electric
   • Industry: Energy Management
   • Description: Specialises in energy management and automation solutions.
   • Benefit from China stimulus: Increased infrastructure and industrial investments in China drives demand for Schneider's energy-efficient solutions.
6. Ferrari
   • Industry: Automotive (Luxury)
   • Description: Ferrari is a renowned luxury car manufacturer, known for producing high-performance sports cars.
   • Benefit from China stimulus: The Chinese stimulus measures, which include boosting consumer spending and improving liquidity, have positively impacted the luxury market. As China's affluent class grows, Ferrari is poised to benefit from increased sales.
7. Roche Holding
   • Industry: Healthcare
   • Description: Specialises in pharmaceuticals and diagnostics.
   • Benefit from China stimulus: Rising healthcare investments in China, especially in pharmaceuticals and diagnostics, boosts Roche’s revenue.
8. TotalEnergies
   • Industry: Energy
   • Description: Major integrated energy company, with strong renewable energy initiatives.
   • Benefit from China stimulus: China’s push towards cleaner energy and infrastructure boosts demand for TotalEnergies' products.
9. L'Oréal
   • Industry: Consumer Goods (Beauty)
   • Description: The world’s largest cosmetics company.
   • Benefit from China stimulus: Growing Chinese middle class and rising consumer spending on beauty products fuel L'Oréal's sales.
10. EssilorLuxottica
    • Industry: Consumer Goods (Eyewear)
    • Description: Leading manufacturer and distributor of ophthalmic lenses and eyewear.
    • Benefit from China stimulus: Higher demand for both corrective and luxury eyewear in China.