China: strong stock selection key to success in 2018

05/06/2018

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​Charlie Awdry and May Ling Wee, China equity portfolio managers, provide a review of the market thus far in 2018 and discuss what may be in store for investors during the remainder of the year. 

How have Chinese stocks performed so far this year?

The first four months of 2018 was a particularly volatile period (with sharp price movements) for Chinese equity markets. January experienced a brief up phase quickly followed by a sell-off, after the Chinese New Year Spring festival in February, which subsequently led to choppy and volatile markets through March and April.

These downward moves reflected a more cautious attitude, probably driven by increasing friction between the US and China on trade. The prospect of rising US interest rates also led to  an increase in volatility in emerging equity markets as a whole. Additionally, investors have finally felt some indigestion over elevated valuations in the internet sector.

What is your outlook for the second half of 2018?

The purchasing managers’ index (PMI) surveys of businesses activity and the tighter monetary conditions in place since the tail end of 2017 suggest we may have seen a peak in Chinese economic activity.

The stronger financial regulations being imposed on the “off bank balance sheet” lending industry (lightly regulated lending mainly by trust companies, brokerages and insurance companies) is hurting weak corporates, while compliance with tougher guidelines has been pushed back to the end of  2020 to allow for a smoother transition. These financial reforms are painful but necessary as China looks to shift its growth model and wean itself off debt.

We think strong corporate profitability and cash flows, together with early signs of monetary easing and falling interbank lending rates, should provide an economic cushion. Meanwhile, currently low valuations are supporting many ‘old economy’ stocks, such as energy and minerals, in the Chinese markets.

Where are the most rewarding investment opportunities likely to be?

In our view, ‘new economy’ stocks, such as those in the consumer-driven and service sectors,   may be more affected by their specific profit growth outlooks and this will likely require strong stock selection. This  is different to 2017 where simply an allocation to China  was the key to successful investing. We find opportunities in selected consumer-driven growth companies at reasonable valuations and unloved but cash generative state-owned ‘old economy’ companies in sectors such as energy and materials.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon China Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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