China-US tensions likely for ‘decades to come’; managers comment ahead of Chinese New Year

by | Feb 1, 2021

Friday 12 February marks Chinese New Year, ushering in the Year of the Ox. Oxen are said to be honest and hard-working and known for their strength and determination, characteristics which will be vital this year as vaccination programmes are rolled out across the globe.

When it comes to Chinese equities, will the Year of the Ox see the bulls maintain their grip and how will the Biden administration impact opportunities in the region? The Association of Investment Companies (AIC) has spoken to investment company managers investing in China. Their thoughts are gathered below.

To reflect the increasing importance of China’s equity market, the AIC will soon be launching a China / Greater China sector.

China-US relationship

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “As I have said in the past, I believe tensions between China and the US will be with us for decades to come. The company remains focused on opportunities supported by ongoing structural shifts in China within the domestic economy. It’s also worth noting that previous sell-offs due to increased geopolitical concerns, have provided attractive entry points for new and existing opportunities.”

Pruksa Lamthongthong, Co-Manager of Asia Dragon Trust, said: “We would expect the evolving US-China dynamics to be a feature of the geopolitical landscape for years to come. While Biden is likely to pursue a multilateral and more predictable stance when it comes to China, his initial moves are sending a pointed message that his administration is unlikely to be a pushover when it comes to managing its relationship with Beijing. It is still early days yet, though, and we will continue to monitor developments from here.”

Roddy Snell, Co-Manager of Baillie Gifford China Growth Trust, said: “Tensions between China and the US are unlikely to diminish. However, despite the headlines, it is noteworthy how unaffected China has been by US actions. For example tariffs have failed to impact Chinese exports which are booming and growing more strongly than any time in the past decade as they take share from Western markets. Threats to delist Chinese companies have simply led to Chinese companies dual listing or listing in Hong Kong where they are welcomed with open arms and many sanctioned stocks have seen their share prices rise after they have been identified by the US. In the meantime, China has prepared extremely well for future tensions by rapidly moving up the manufacturing value chain, rebalancing its economy away from investment, and is arguably innovating faster than any country in the world. R&D already exceeds the US and EU combined.”

COVID’s impact on opportunities and risks

Rebecca Jiang, Co-Manager of JPMorgan China Growth & Income Trust, said: “While COVID-19 caused a short-term shock to the Chinese economy, the government’s quick and comprehensive mobilisation at the start of the pandemic meant that the impact to consumption and business confidence has been largely cyclical and not structural. While some industries are still seeing some short-term pain as a result of the pandemic, overall we are finding that activity levels on the supply side of the economy have recovered more quickly than on the demand side, although both are showing some encouraging signs.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “Government stimulus has clearly been a factor supporting the recovery, but overall has been more restrained and targeted than measures seen in most Western economies. This therefore leaves room for further policy support if required. Regarding markets, while valuations are clearly not as attractive as they were earlier in the year, they continue to trade at a significant discount to the US markets despite arguably better growth prospects. The return to ‘normality’ in China should mean lower risks relative to many other countries with higher uncertainty as they still struggle to get the virus under control. On a stock level while some individual stocks have done quite well, particularly the COVID-19 beneficiaries, there are many laggards and still significant value in many parts of the market.”

Roddy Snell, Co-Manager of Baillie Gifford China Growth Trust, said: “As is the case in other markets, we’ve seen growth for online-centric businesses increase as lockdown accelerated adoption and penetration of services such as e-commerce, online food delivery, and online entertainment. Whilst share prices have reacted strongly, we believe the opportunity set for many of these companies has actually increased. At the same time their competitive positions have strengthened markedly. As such, we think returns going forward are likely to be very strong and in most cases remain very happy with our holdings.”

Opportunities in food delivery and lower carbon

Ian Hargreaves, Co-Head of Asia and Emerging Market equities and manager of the Invesco Asia Trust, said: “The opportunities we like most in China are consumer-related names, exposed to favourable structural growth trends such as the emergence of the middle-class, growth in domestic consumption and increased usage of the internet. Internet companies such as online gaming developer NetEase and e-commerce player have been very good long-term investments, while more recently we’ve enjoyed strong returns from the likes of baijiu distiller Jiangsu Yanghe and Suofeiya Home Collection, which manufactures and sells customised wardrobes and cabinets.”

Rebecca Jiang, Co-Manager of JPMorgan China Growth & Income Trust, said: “As Chinese millennials continue to seek various services at their fingertips, the growth opportunities in the consumer discretionary sector look compelling. Meituan, the Chinese equivalent of Deliveroo, is a prime example of a multi-level technology service platform witnessing an accelerated growth in its user base. The company, whose USP is its ability to have fresh food delivered in 30 minutes within a 3-kilometre radius, is the country’s leading website for locally found food delivery services, consumer products and retail services. Since the beginning of the pandemic, merchants have accelerated their migration to online distributors such as Meituan, particularly branded restaurants with high quality supply, which have traditionally focused on in-store dining instead of delivery services.

“Furthermore, the technology sector continues to offer huge potential over the long term. Chinese millennials are more tech-savvy than their previous generations, with over 90 percent of this population having access to a smartphone. One of the companies benefiting from the acceleration in demand for technology is Bilibili, a Chinese video sharing platform themed around animation, comics and games, similar to the app TikTok. It is a prime example of a ‘New China’ company that is profiting from the changing consumption patterns of a new generation. Highlighting the exceptional levels of daily user activity on its platform, Bilibili reported total net revenues of US$475.1 million, representing an increase of 74% from the same period of 2019.”

Pruksa Lamthongthong, Co-Manager of Asia Dragon Trust, said: “We are also seeing China becoming more committed to a greener and lower carbon future, as it aims to be less dependent on imports of fossil fuels (especially oil) which leaves it vulnerable to supply disruptions from overseas. This presents long-term investment opportunities in the renewables supply chain that supports industries such as wind power, solar power and electric vehicles. Many of the companies within this renewables value chain are located in China. With the Asia Dragon Trust, we have exposure via Yunnan Energy New Material, the world’s largest maker of lithium-ion battery separators for electric vehicles; Longi Green Technology, the world’s largest solar wafer maker; and China Resources Gas, one of the top city gas distributors, with the growing share of gas in China’s energy mix supporting its prospects.”

Long-term outlook

Ian Hargreaves, Co-Head of Asia and Emerging Market equities and manager of the Invesco Asia Trust, said: “The pandemic has been enormously disruptive, but China has fared relatively well compared to other countries in the region, with activity levels now back to pre-COVID-19 levels in many sectors. The economic recovery has also been managed without the authorities having to rely on the sort of fiscal impulse manufactured in developed economies, with suggestions that some form of modest monetary tightening is a possibility. Such relative restraint is a positive for the longer-term outlook. We are confident that China’s large and growing equity market will continue to provide us with a good selection of companies to choose from.”

Pruksa Lamthongthong, Co-Manager of Asia Dragon Trust, said: “We are big believers in China’s premiumisation story, wherein higher disposable incomes spur demand for healthcare products, wealth management services, insurance and luxury goods and services. Structural growth drivers such as the adoption of cloud applications, 5G and artificial intelligence also remain intact. China’s capital markets have continued to function extremely well despite COVID-19 and geopolitical tensions. Increasing foreign participation, underpinned by structural growth opportunities connected to a growing middle class, supports our positive long-term view on this market.”

Dale Nicholls, Portfolio Manager of Fidelity China Special Situations, said: “We remain firm believers in China’s long-term structural growth story and are focused on identifying companies – across both public and private markets – that are best placed to benefit from a growing middle class and the shift towards a more consumption-driven economy.  With our in-depth bottom-up fundamental analysis, we are uniquely placed to identify – very early on – the many opportunities available among mispriced companies that offer direct exposure to China’s long-term growth story – in effect: tomorrow’s winners.”

Roddy Snell, Co-Manager of Baillie Gifford China Growth Trust, said: “As Chinese companies continue to ramp up their investments in research and development, combined with the world’s largest middle class whose appetite to consume and adopt technology is arguably faster than anywhere else in the world, we are confident China will be one of the fastest growing countries over the next decade. We are also confident it will become the world’s largest economy and be home to many of the world’s leading technology firms.

“It is perhaps surprising that despite these attractions China is significantly underrepresented in global portfolios: Globally China is 18 per cent of market cap, 30 per cent of listed stocks, but only 2.5 per cent of global funds’ allocations. As the market continues to open up and its vast potential is realised, this simply has to change. We believe investors would be wise to consider holding China now to get ahead of this substantial anomaly.”

Investment companies with highest exposure to Chinese mainland, Hong Kong and Taiwan

Investment company AIC sector Portfolio held in

Chinese mainland (%)

Portfolio held in Hong Kong (%) Portfolio held in Taiwan




Fidelity China Special Situations Country Specialist: Asia Pacific – ex Japan 57.80 40.70 1.50 100.00
JPMorgan China Growth & Income Country Specialist: Asia Pacific – ex Japan 95.50 3.60 0.80 99.90
Baillie Gifford China Growth Country Specialist: Asia Pacific – ex Japan 99.00 0.00 0.00 99.00
JPMorgan Asia Growth & Income Asia Pacific Income 39.28 11.54 15.19 66.01
Invesco Asia Asia Pacific 30.80 11.35 18.12 60.27
Asia Dragon Asia Pacific 39.53 9.60 10.67 59.80
JPMorgan Global Emerging Markets Income Global Emerging Markets 24.60 7.50 22.20 54.30
Schroder Asian Total Return Asia Pacific 4.46 27.40 19.05 50.91
Schroder AsiaPacific Asia Pacific 6.79 29.21 13.52 49.52
JPMorgan Emerging Markets Global Emerging Markets 36.92 0.00 12.53 49.45
Aberdeen New Dawn Asia Pacific 32.50 7.24 8.91 48.65
Pacific Horizon Asia Pacific 39.00 2.00 5.00 46.00
Schroder Oriental Income Asia Pacific Income 8.44 15.97 19.53 43.94
Templeton Emerging Markets Global Emerging Markets 28.70 0.00 14.90 43.60
Henderson Far East Income Asia Pacific Income 21.82 10.71 10.59 43.12
Aberdeen Emerging Markets Global Emerging Markets 28.00 2.00 8.00 38.00
Genesis Emerging Markets Global Emerging Markets 29.60 0.00 5.70 35.30
Fidelity Asian Values Asia Pacific Smaller Companies 17.18 8.13 7.53 32.84
Aberdeen Asian Income Asia Pacific Income 11.05 3.48 17.23 31.76
Pacific Assets Asia Pacific 4.37 8.37 14.47 27.21

Source: AIC. Data as at 31 December 2020.

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