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If any confirmation were needed that China is a country with superb investment potential, but also a high risk one with the capacity to move sharply down as well as up in value, then the last year has provided it. During 2007 the top performing
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| Popular funds | Initial savings |
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| Jupiter Emerging European Opportunities | 5.25% |  |
| Schroder UK Alpha Plus | 5.25% | |
| Neptune Income | 5.00% | |
| Allianz Global Investors RCM BRIC Stars | 4.00% | |
| First State Investments Greater China Growth | 3.75% | |
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To help answer these questions we sought the views of three respected fund managers investing in China: Philip Ehrmann (Jupiter China), Henrietta Luk (Melchior Asian Opportunities) and Martin Lau (First State Greater China Growth). These individuals are experienced investors in the Greater China region – which encompasses China, Hong Kong and Taiwan – and have experienced conditions like this before.
The region’s markets have seen stellar growth over recent years, so a period of profit-taking is not surprising. However, it does not alter the long term reasons for investing in Greater China – the emergence of China as an economic superpower – and all three managers expressed confidence in the region’s prospects.
They agreed that the principle reasons for the falls have been concerns over global economic growth and rising inflation. The old adage that ‘when American sneezes, the world catches a cold’ might hold true during this credit crunch, but there is reason for optimism. “The Chinese economy is less affected by slowing US demand than ten years ago” said Philip Ehrmann, adding that, “its financial system is little exposed to the ongoing credit crisis.”
The short term struggles of the Jupiter China Fund highlight how medium-sized and smaller companies have suffered during the market falls. Philip Ehrmann believes that once investors focus on the fundamental strength of businesses rather than the uncertain global picture then these stocks could rebound strongly. He believes the forthcoming earnings reporting season could be a catalyst for this turnaround.
Sharply rising inflation has been causing concern for investors however, as Henrietta Luk points out, price inflation of core goods and services remains relatively modest. It is a surge in meat and vegetable prices – exacerbated by unusually severe winter storms in China – that has caused the inflation spike. “Inflation numbers should fade in the second half of the year,” said Ms Luk.
Examples of where Henrietta Luk sees value in the Chinese market are the construction and retail industries. Cement producers are significant beneficiaries of the massive urban expansion happening in China – a process that is central to the development of the Chinese economy and is unlikely to be scaled back even during a tougher period for the global economy. Meanwhile consumers in China, especially in the growing middle classes, have a growing appetite for branded goods. Ms Luk believes that this, coupled with the imminent Beijing Olympics, will create a positive environment for Chinese sportswear retailers and she has been investing in this area.
In contrast to the aggressive investment style of Henrietta Luk, Martin Lau at First State continues to employ a relatively cautious approach to investing in this high risk and volatile region. This has paid off in recent months. He expects China – like all world markets – to remain volatile in the short term until there is clarity about the full impact of the credit crunch on the global economy.
Despite this, he continues to find attractively priced companies, particularly in Taiwan where recent election results signalled a move towards warmer relations with the government in Beijing. In Hong Kong it is the property sector that he favours as falling interest rates create a positive environment for property prices. In mainland China itself he is using the current market weakness to add to his holdings in high quality companies at lower levels.
In conclusion, these three managers remain positive about the long term prospects for the Greater China region. They are active in the current markets and working to position their portfolios in undervalued stocks and sectors they believe will bounce back strongly when markets recover. The falls in recent months underline the risks involved in this (and any) emerging market. In our opinion those investors prepared to weather the volatility will be well rewarded over the long term.
For investors keen to benefit from the long term growth potential in China, but who are concerned about short term volatility, regular savings are worth considering. When prices rise any existing investments will benefit, but if markets fall your regular monthly contributions will purchase more units in your chosen fund. Over time this has the effect of averaging out your entry price into markets and takes away the need to agonise about when is the perfect time to buy. As long as your eventual selling price is higher than your average buying price you will have made a profit.
View Key Features for the Jupiter China, Melchior Asian Opportunities and First State Greater China Growth funds.
Fund research is provided by Hargreaves Lansdown. Hargreaves Lansdown is an independent broker offering unit trust, stockbroking and other pension and investment services. No news or research item is a personal recommendation to deal.