With the vibrant Year of the Dragon dawning today (10th February 2024), UK retail investors might be drawn to the allure of the Chinese market. While ancient lore paints a picture of explosive growth and prosperity, it’s important to remember that investing is far from fairy tale. There are always ups and down along the way and the Chinese market is a classic example of that.
China’s ups and downs
The Chinese stock market saw significant growth over the past 20 years, particularly in the early years. For example, the Shanghai Stock Exchange Composite Index (SSE Composite) gained around 1,200% between 2003 and 2007. However, growth has stagnated in recent years and since 2015 it has declined slightly. Partly because of its response to the pandemic.
After emerging from its extended lockdown in January 2023, China’s stock market has experienced significant volatility. Several investor concerns, including rising authoritarianism, a cooling property sector, potential deflation and slower economic growth, have contributed to a decline in China funds.
The list of reasons to steer clear of China is not short. The Chinese consumer emerged from Covid with little desire to spend the money they had squirrelled away during their enforced confinement. That’s not hard to understand when you consider that youth unemployment stands at around 16%. Meanwhile, the property sector continues to wither on the vine thanks to the government’s pre-pandemic efforts to cool the overheated market, which has had a knock-on effect on the economy.
Key trends shaping China
Several key trends shaping the Chinese market today include:
Global slowdown. The world economy faces potential recessionary headwinds, impacting an export-reliant China. However, its domestic consumption surge offers a counterpoint, driven by a burgeoning middle class and homegrown demand for goods.
Tech transformation. China’s tech sector, though facing regulatory scrutiny, remains a global force in AI, cloud computing, and clean tech.
Geopolitical tensions. Trade tensions and evolving global alliances add uncertainty. Investors should stay informed and factor in potential disruptions.
Consumer staples. With a growing middle class demanding healthcare, education and everyday necessities, this sector is becoming increasingly resilient and stable.
Infrastructure. Chinese government investment in both domestic and foreign infrastructure projects could benefit construction and materials companies.
Green energy. China’s commitment to carbon neutrality creates opportunities in renewable energy and related technologies. However, the government is known to change its mind and so changing competition and policy shifts need to be carefully assessed.
Investing wisely in China
Despite these challenges, China’s vast potential as a global economic powerhouse remains significant. By focusing on global trends and investing responsibly, you can leave the fortune-telling to the Chinese horoscopes and navigate the Year of the Dragon with a bit more confidence.
Based on the above, it’s fair to say that investing in China requires a long-term perspective and a healthy dose of caution. Stock-picking is impossible in such a complex and opaque market so for retail investors, the best way to get exposure to China is through a China fund or China ETF.
If you have a long-term investment horizon, here are a few funds that are worthy of consideration:
- Allianz China fund
- Fidelity China Focus fund
- HSBC China A-share Focused fund
- JPM Greater China
- L&G E Fund MSCI China A Ucits ETF (exchange-traded fund)
- Market Access Stoxx®ChnAMinVar ETF (exchange-traded fund)
There are plenty more China funds in the market and it pays to do some thorough research. A good starting point is your investment platform which will list all the Chinese funds that you can invest in. If you don’t yet have a platform, you can find the right one for your circumstances here.
But please don’t put all your eggs in a Chinese basket. You should always balance your portfolio with exposure to other regions and asset classes so that your risk and returns are diversified. Diversification is the key to successful, long-term investing.
Happy Year of the Dragon!