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July 9, 2022

The Times – If you believe in China’s growth story, now is the time to buy

By 2030 China will have overtaken the United States as the world’s largest economy — so says the Centre for Economics and Business Research.

China has long been promoted by the funds industry as offering long-term growth opportunities, and early investors will have seen their faith heavily rewarded.

An investment into the iShares China Large Cap exchange traded fund (ETF) at its launch in November 2004 would have returned almost 500 per cent to mid-February 2021, according to FE fundinfo.

China has had to contend with political concerns over the erosion of democracy in Hong Kong and the persecution of the Uighurs, however, and there has been an economic crackdown by the ruling party on e-commerce, ride hailing, video gaming and private education companies.

Then there is Evergrande, China’s largest property developer, which has suffered a debt crisis. More recently, China’s zero-Covid policy has led to recurring lockdowns in some of its largest cities, which has had an enormous impact on the economy.

So the question is: should you invest in China, or is it too risky?

Between February 2021 and the end of May this year, the Nasdaq Golden Dragon China index, which tracks the share prices of Chinese companies listed in the United States, plunged 67 per cent. From last February to this March half of the gains generated by the iShares ETF had been wiped out.

“Last February people were clamouring to get China into their portfolios,” said Andrew Hardy from Momentum Global Investment Management. “Wind forward 12 months and suddenly the headlines are ‘Is China uninvestable?’ But the market has fallen 50 per cent and valuations have actually improved a lot.”

By early May the forward price-to-earnings ratio on Chinese stocks — a popular valuation method that looks at a company’s expected profits relative to its current share price — had fallen to an extremely low 8.9 times. In the United States it is 17.5 times and in the UK 10.3 times.

Hardy has largely avoided buying into falling markets in the US, but has started to add a Chinese equity allocation to his funds in recent months.

So has Mike Coop from Morningstar Investment Management, who thinks that China has been one of the few “super cheap” areas so far this year.

“It has been regarded as a pariah asset the same way energy was in 2020. It got abandoned, it got written off. For us it was one the most attractive assets that we could find,” Coop said.

That has paid off so far, as the rollercoaster looks to be taking a turn for the better. Share prices are up 20 per cent in the past six weeks.

There could be more gains to come. Ewan Markson-Brown from Crux Asset Management thinks that the outlook for technology companies is more positive in China than it is in the United States. This is because share prices and earnings expectations have both fallen in China. In the US, by contrast, share prices have fallen but analysts have not adjusted their profit expectations — when they do share prices are likely to fall further.

Markson-Brown said: “I think you can be a growth investor in China and make money, while in the US the markets might still be choppy for the next 12 months or so.”

Aside from the capitulation in share prices and sentiment for Chinese shares, the positive outlook stems from the fact that the regulatory crackdowns seem to be easing and there is hope that, at some point, the government will concede defeat on zero-Covid and the economy will start to reopen fully.

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