How can investors navigate China markets?

by | Nov 2, 2022

Buildings in Beijing, China

Written by Kate Marshall, Lead Investment Analyst, Hargreaves Lansdown

China’s latest political showcase has left investors uncertain about the prospects for the world’s second largest economy and questioning whether to invest in the region at all.

While it was no surprise Xi Jinping would break convention and take a third term as leader of the Chinese Communist Party, his appointment of loyalists, and removal of rivals, from the party’s inner circle came more of a shock. The heightened presence of Xi’s allies could indicate a lack of checks and balances inside the government, although we have already seen Xi work on consolidating his power over the past decade.

While growth remains a priority for Xi’s government, this has shifted to an overall focus on ‘development’ incorporating growth, as well as national security and common prosperity. Self-reliance is an increasingly important theme and its likely we’ll see China focus on developing its own manufacturing and technological prowess.

Sustainalytics recently judged several tech names, including Tencent, Baidu and Weibo to be in violation of UNGC Principle 2 – human rights – because of their links to suspected Chinese government surveillance, censorship and other freedom of expression breaches, throwing up challenging questions about how to analyse China’s ESG credentials.

In addition, tensions between the US and China remain rife and likely to present further implications for economies globally. Any attempt to “decouple” completely will be difficult given the impact on businesses and difficulty in unwinding supply chains. An invasion of Taiwan remains unlikely given Xi has seen the realities of this action and potential retaliation from the West, but as ever cannot be ruled out. And while the rumour mill suggests that China will abandon its Zero Covid policy – which has weighed heavily on economic growth – in March following the People’s Congress, nothing is guaranteed.

The uncertainty means Chinese equities are likely to remain under pressure in the near term and at least until the dust settles or there is a clear catalyst for recovery, such as the lifting of strict Covid restrictions. Valuations and sentiment are low, so this could present an opportunity for those prepared to hold their nerve and play the long game. Investors looking for broader exposure to Asia Pacific markets have the option of investing in funds with or without China exposure.

Kate’s fund picks for navigating a volatile China market

FSSA Asia Focus

While China’s political landscape continues to evolve, fund manager Martin Lau believes pockets of innovation, entrepreneurship and other opportunities remain. As markets could remain volatile, he focuses on high-quality companies with strong franchises, balance sheets and management teams. China currently makes up around a quarter of the fund, though it also invests in countries including India, Hong Kong and Singapore. Governance is high up on Lau’s agenda, as are environmental and social issues. His investment philosophy is founded on stewardship and he only invests in businesses he can engage with and are run in a way that’ll benefit all shareholders.

Jupiter Asian Income

This fund doesn’t currently invest in China, so it’s an option for investors looking to access long-term growth opportunities across Asia, but without exposure to China. Jason Pidcock, the fund’s manager, has concerns about China, both economically and politically, including rising tensions with the US, and the potential for growth to continue to slow. The fund mainly focuses on more developed Asian markets, such as Singapore, Australia, and Taiwan, as well as some emerging Asian countries like India. The fund also pays investors an income, making it different from many other Asian funds that focus on growth.

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