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The trust aims to provide long term capital growth by investment in companies which are quoted on the stock exchanges of Hong Kong, China and Taiwan or which derive a substantial part of their revenues or profits from these territories. In January 2016, the fund’s benchmark was changed from the MSCI Golden Dragon to the more widely used MSCI China. The company can use borrowing to gear the portfolio within the range of 10% net cash to 20% geared in normal market condition.
The long term economic growth story for China is very much still in place with per capita income expected to increase by over 60% over the next ten years to around $12900, significantly crossing the high-income threshold. Alongside this growth, China will need to move up the value chain shutting down capacities in old industries and developing more activities in high end manufacturing, healthcare, education and environmental services. The percentage share of consumption to GDP will rise to more developed country averages.
In the short term, there are also several reasons while I fell it is currently appropriate to supplement existing Chinese exposure.
- Macro factors remain supportive (e.g. GDP growth, money supply, bank liquidity)
- Exports are returning to growth and the consumer remains buoyant
- “Bubbles” in certain real estate areas are being addressed
- Positive trends for corporate earnings revisions
- Attractive valuations, especially on PE and PEG ratios
- Market under owned by emerging and global equity funds
- Gradually increasing Chinese weightings by major benchmark providers e.g. MSCI will lead to significant inflows by passive and some active funds over time
- Risks could include DEBT, government interference and less than ideal accounting, more relevant to smaller companies. It should also be noted that the shares have a higher than average volatility
The recommended investment trust portfolio (JMC) is concentrated with top ten holdings accounting for 44.3% at the end of March 2018.
- The fund is overweighed in sectors exposed to “New China” with greater emphasis on services rather than manufacturing. Information technology (mainly Tencent and Alibaba) represents over 31% of total assets while other leading sectors (all over 10% of portfolio) include consumer goods, financials and health care. “Old China” industries such as Telecoms and Energy are underweighted. This sector bias also goes some way to explain why the trust has significantly outperformed the MSCI China ETF (FXC) over one year and five years.
- The fund has also outperformed its peer group over the last one three and five years
- Future fund focuses include areas of consumption, healthcare, environmental protection and technology/internet.
- The current trust discount, near 13%, at a price of 318p, does not seem to reflect the longer-term market potential and is currently near the lower end of the 12-month range. See Hargreaves graph below.
- Fund recommended for purchase as part of an emerging market allocation.
Sources: Trustnet,Numis,London Stock Exchange,Hargreaves,Winterflood,own research.
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
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