Quick view: China/US trade war truce

05/12/2018

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After talks at the G20 summit in Argentina last weekend brought a temporary truce in the China/US trade wars, Charlie Awdry, China equities portfolio manager, provides an update.

 

A White House statement issued following the G20 summit said that President Trump had delayed any action on his threat of 25% tariffs on Chinese imports for 90 days. News of this three-month negotiation period was positive for sentiment on China, with most expecting Trump to follow through with his threat in January.

Sell-side upgrades
At least one stockbroker has upgraded their view of Chinese equities on the back of this pause for negotiation. With the MSCI China Index down approximately 26%1 from its January 2018 highs, we believe much of the weak investor sentiment surrounding trade wars and the potential economic impact has already been priced in.
 
Valuations becoming attractive
In late October we said that growth shares were back at buyable levels and together with value shares being attractive (excluding banks), this was bullish. Did investors notice that the two mega capitalisation Chinese internet stocks Tencent and Alibaba rose in November? Across the market we feel that more attractive valuations, combined with the fact that investor sentiment is broadly negative - at a time when we are also seeing more coordinated and supportive policy action - is supportive of medium-term performance.
 
In the growth area of the market, we highlighted Macau casino shares as an attractive area after the recent sell-off. We added a position in Sands China in late October and increased the holding last week. The chart below shows the share price of the stock at a low in late October when we initiated the holding. At that time, the stock was trading at 11x 2014/2015 levels2 on an EV (enterprise value) and EBITDA (earnings before interest, taxes, depreciation and amortisation) basis, despite good growth potential.
 
 
Sands China share price
 
 
 
 
Source: Bloomberg, in Hong Kong dollars, as at 4 December 2018.
Past performance is not a guide to future performance.
 
 
In short, we do not deny that there are medium-term macroeconomic issues to address, such as debt and the currency, but the long-term case for China remains very much intact. A selective approach to investing in the region looks even more compelling with some valuations currently at attractive levels. 
 

Source:
1 Thompson Reuters Datastream, as at 4 December 2018
2 Janus Henderson Investors, as at 31 October 2018

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

Janus Henderson China Opportunities Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • 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.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • 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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Janus Henderson Horizon China Fund

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • 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.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • 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.
  • Leverage arises from entering into contracts or derivatives whose terms have the effect of magnifying an outcome, meaning profits and losses from investment can be greater.
  • 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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