​​​Supportive backdrop for further Chinese gains

23/08/2017

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​In this update, Charlie Awdry and May Ling Wee, China portfolio managers, discuss the reasons behind the continuation of the rise in Chinese stocks this year and why they think it may persist for longer than many expect.

Chinese equities have continued to strengthen into the second half of 2017 but what is notable is that China is beginning to outperform other markets such as the US (S&P 500 Index(in dollar terms) − see chart.  One of the reasons for this is the better-than-expected macroeconomic backdrop, including sustained strength in the economy, since the second quarter of 2016.
 
China vs the US – relative performance improving?

Source: Bloomberg, Janus Henderson Investors. MSCI China vs S&P 500 price returns, monthly data January 2008 to July 2017. Past performance is not a guide to future performance. 
 
A firmer yuan 
 
At the start of the year, one of investors’ lingering concerns was whether the yuan would weaken but, to the delight of sterling and dollar-based investors, it has not. Intervention by China’s central bank to maintain stability of the currency, combined with the weaker US dollar, increased optimism on the economy and receding concerns about fund outflows, have all helped the yuan to appreciate since the end of May. As a result China’s foreign currency reserves have been steadily rising, reaching $3.08 trillion in July. 
 
Strong corporate earnings driving returns
 
Last year, the corporate interim results season in August proved to be a positive catalyst for Chinese stock returns and we think there is a good chance of a repeat performance in 2017. The August 2017 earnings season shows signs of being strong, with a number of positive profit alerts over the month. These profit alerts were announced by companies operating in sectors of the old economy in China, such as materials and industrials, which in recent years have fallen off investors' radars. Strength in corporate earnings in these sectors has been driven partly by higher demand but also an improving business environment as the Chinese government enforces measures to curb heavily polluting sectors and illegal activities. 
 
In our portfolios, Alibaba and Tencent (internet), China Lodging Group (budget hotels), as well as Ping An (insurance) are examples of companies that have recently reported strong profit growth and whose shares are performing well. Additionally, broker analysts often understate the amount by which profits move for a given change in revenue – both on the way down and up. They are generally more optimistic and often start the year with strong forecasts that they then have to cut. While this is occurring in markets such as India, the opposite is happening in China in 2017 – analysts are generally revising earnings forecasts for Chinese equities upwards. 
 
Let the good times roll?
 
In our view, the profit cycle is likely to drive the economic cycle for longer than many expect. Increasingly, drawn by the strength in performance, investors are looking with more interest at the investment case for China and there are signs of an increasing appetite for Chinese equities. In June, Hong Kong saw the first properly “hot” (strongly oversubscribed) initial public offering (IPO)1  since the sustained rise in Chinese markets this year with Wuxi Biologics rising 37% on its first day of trading. When these hot IPOs become commonplace we will begin to be more circumspect on our market outlook, but for now we see this as a positive indicator that the current bull market in Chinese equities may be far from mature. Moreover, President Xi will be looking to maintain economic and political stability in the lead up to the Party Congress later in the year where the performance of the government over the past five years will be assessed, new policies and goals announced and senior leadership appointed. This combination of supportive factors suggests to us that the Chinese market’s strength may continue. 
 
1 In an initial public offering, shares in a private company are offered to the public for the first time.
 
Note: stock examples are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

 
 

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

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

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.
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  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • 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.

Risk rating

Janus Henderson Horizon China Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. 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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

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.

Risk rating

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