Chinese equities: could 2019 see a much needed shake-out?

27/11/2018

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Chinese equity markets will be anything but dull in 2019, says Charlie Awdry, China equities portfolio manager, with plenty of opportunities for the active investor.


What are the key themes likely to shape markets in 2019?

Macroeconomic factors have largely driven Chinese equity markets this year and – given the huge significance of these global events – we would expect them to shape markets in 2019.

Firstly, the beginning of quantitative tightening* and rising interest rates in the US has triggered a shortage of US dollars in emerging markets and precipitated much weaker emerging market currencies. In China, we see a more powerful government than in many other emerging markets. With trade surpluses falling, we can expect more currency volatility than previously. Secondly, we will be watching closely to see how rising US/China trade friction develops and how China reacts. In 2019, we will start to see the impact of the trade war on global supply chains. International relations are already evolving rapidly: at the start of 2018 we would not have predicted an official visit to Beijing from Japanese Prime Minister Abe.


Where do you see the most important opportunities and risks within your asset class?

Importantly for us as stock pickers, shares in many of the sectors considered to have more growth characteristics - such as internet, healthcare and consumer - have come back to buyable ‘growth at a reasonable price’ levels. Consequently, both growth and value areas of the market now offer opportunities. Unfortunately, this is the result of sentiment turning more negative during the year but the medium-term outlook is positive; driven by urbanisation, rising incomes and social change.

Despite increased foreign investor interest in Shanghai and Shenzhen listed ‘A’ shares following their inclusion in MSCI indices**, 2018 has been a poor year for these markets. As we write, domestic sentiment is poor and risk aversion so high that market implied discount rates (the return demanded by investors to compensate them for investing in the market) are very high. This can often be a good time to add exposure as long-term investors, despite how uncomfortable that feels.

We do not currently own any Chinese bank shares because, with reforms and regulatory pressure on the sector, they are likely to be a value trap. We are also avoiding companies with US dollar debt, i.e. Chinese property development companies. Perhaps 2019 will finally see many of these companies’ funding channels dry up and a much needed consolidation phase take place. This would be troublesome for bank shares, reinforcing our view on that sector.


How have your experiences in 2018 shifted your approach or outlook for 2019?

There is no shift in our investment approach, which has been proven over many years. Rather we just accumulate another year’s experience and some more wisdom to inform our judgement going forward. We are reminded how fickle and extreme investor sentiment can be in China: Chinese ‘H’ shares started January 2018 with 17 consecutive ‘up’ days. Investors in China need patience, persistence, tenacity and stamina!


*Quantitative tightening is the opposite of Quantitative Easing where the central bank employs a contractionary monetary policy to decrease amount of liquidity within the economy.

**An MSCI index is an international measurement of stock market performance in a particular area. MSCI stands for Morgan Stanley Capital International.



Which themes have the potential to redirect markets in 2019? Download our Infographic to find out




These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

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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Janus Henderson China Opportunities Fund

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • 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.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • 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.
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  • The Fund may incur a higher level of transaction costs as a result of investing in less developed markets compared to a fund that invests in more developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.

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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.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • 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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