There are times in investing when going against the flow can be very profitable. I believe that investing in China today is one of those times.
Conventional wisdom holds that the Chinese growth "miracle" is over after a number of years growing at a double-digit rate, with the economy now slowing rapidly. Writing recently in the Guardian, renowned economist Kenneth Rogoff highlighted the risk of Chinese slowdown, pointing out a number of key challenges that could derail the Chinese government as they seek to rebalance the behemoth that is the Chinese economy.
But, as is often said in financial markets, there is a price for everything. Moreover, money is rarely made by investing in what is comfortable – government bonds being a case in point at the moment, relatively safe but offering only ultra-low yields. China looks a compelling investment opportunity at the moment, in spite of the widespread "slowdown" worries.
China is still growing at over 7% per year...
Whatever concerns economists may have over China, let us not forget this Asian giant is still growing at over 7% per year in real terms; compare that to the sub-3% growth of the UK, and the non-existent growth in the eurozone.
This sounds strong to me, even if no longer a double-digit growth rate. After all, the law of large numbers makes it increasingly difficult for China to continue to grow at such a fast rate, now it is officially the second-largest economy in the world after the US when adjusting for the cost of living (according to the World Bank), more than double the size of the third-placed country, India.
Chinese Stocks Are Very Cheap
The Chinese stock market is one of the cheapest stock markets in the world, when judging by a standard metric such as price/earnings (P/E). Chinese stocks on average trade at under 9x forecast P/E, while offering a dividend yield of well over 3%. Compare this to the US stock market which trades at over 15x P/E, or the FTSE 100 which trades at nearly 13x P/E. In addition, profit growth is forecast to remain in the double digits, more than can be said for the European and US stock markets next year.
Chinese stocks are starting to outperform
The MSCI China A-Shares exchange traded fund (ETF) listed in London has gained nearly 26% over 2014 to date, already an impressive return and far outstripping a US S&P 500 ETF (+13%), a Europe-ex-UK ETF (-6%) and a FTSE 100 ETF (-4%).
But since the beginning of 2009, Chinese shares have only gained 47% in total (including dividends) in sterling terms, versus +115% for the S&P 500 and +77% for the FTSE 100, suggesting that there could be a further catch-up effect to come (Figure 1).
How to invest (simply) in China
So in my eyes, the three factors value, growth and price momentum all line up for Chinese stocks. How might you buy into this theme in your own portfolio? I can suggest a three easy alternatives, via exchange-traded funds and via investment trusts.
- The CSOP Source FTSE China A50 UCITS ETF (code: CHNA). This London Stock Exchange-listed fund invests in China A-shares, which remain the best-value type of Chinese stock available and invests in large financial companies such as insurer Ping An, bank China Merchants Bank and oil company Petrochina.
- The Fidelity China Special Situations Fund (code: FCSS). This is an investment trust that invests selectively in a range of large- and mid-cap Chinese stocks, and which currently trades at a near-13% discount to the fund's net asset value. That means that you can currently buy 100p of Chinese stocks for just over 87p, not a bad deal!
- A third option is to invest indirectly in the China theme via a fund containing stocks listed in Hong Kong. This can be done with the Invesco Powershares FTSE RAFI Hong Kong China ETF (code: PSRH), which invests in the likes of property company Cheung Kong Holdings and airline company Swire Pacific (the parent company for Cathay Pacific).