The IMA China sector was the worst performing unit trust sector in the first half of 2014 but is now up nearly 12% in the last 3 months. So should investors buy now and which funds should they look at?
Is there any truth in the China rally?
There’s no denying that a pattern has emerged in Chinese equities in the last few years. Its roots lie in the Chinese New Year and corresponding government stimulus which rallied markets. In 3 out of the 4 years a first half year decline in the MSCI China Index has been seen strong strong half year rallies - at some point.
But therein lies part of the problem. The old sell-in-May adage which some investors adhere to is more centred around dates. The pattern in Chinese equities is even less clear. In 2011 the rally started in October, in 2012 it started in September while last year it began in June (see chart below). Trading short term is all about knowing when to get in and out. The problem is that Chinese equities are volatile and investors can quickly be left sitting on hefty losses.
During a period which saw Chinese equities rally 32%, an investor who bought on 1st Jan 2011 would have made just 3% in sterling terms to date.
But if you are going to trade based on recent history there is a bigger omen hidden beneath this new China investment mantra. Between July 2011 and the the market low of October 2011 the MSCI China Index had its biggest correction and fell over 30%. Which roughly coincided with the end of QE2 in the US and investor risk aversion.
We know the US Federal Reserve is looking to end QE3 in the Autumn, so if history really is going to repeat itself it would be unwise to bet your house on Chinese equities in the very short term.
But what the mantra does highlight is that now is a good time to buy Chinese equities from a long term perspective. It is one of the truly cheap emerging markets on a valuation basis.
Investor have limited choice when it comes to investing in China but the stand out funds are:
Unit trust
Invesco Perpetual Hong Kong China - one of the oldest and largest funds in its sector (at £290m). The fund is one of the top performing China funds over the last 3 years (up nearly 27%). A consistently strong performer that has proved more resilient than many of its peers during market sell-offs, as evidenced by its comparatively low volatility. One to buy and hold.
Investment Trust
Fidelity China Special Situations - not for the faint hearted but if you believe Chinese equities are good value then Fidelity China Special Situations is worth a look. Unlike its unit trust peers the investment trust can borrow to invest (called gearing) which this trust does at over 20% of net assets.This can boost returns but also increases risks to the downside. The trust currently trades at a discount of around 10% to its NAV. With its small cap focus and technology exposure this is a high risk play. If Chinese equities take off and the fund can avoid any stock specific hiccups then this trust could surprise to the upside.
