Interactive Investor

Two great investments in the world's best consumer story

2nd March 2018 15:23

Dzmitry Lipski from interactive investor

Chinese equities had a strong 2017, supported by stable economic data, upward earnings revisions and reasonable valuations. Last year, the MSCI China index returned 40.7% in sterling terms, which was mainly driven by the largest internet companies such as Alibaba and Tencent.

As a result, funds investing in China delivered the best returns to UK investors. With an average fund return of 36.5%, the IA China sector was the best performing sector for the year and it has started 2018 on a strong footing, delivering the best avarage return of 4.6%.

The Chinese economy is worth almost $12 trillion and its bigger than both Germany and Japan, and it could soon overtake the US. Since the 1970s, the economy has grown at a rate of up to 10% a year, with 6.9% last year. China's consumer market is the world's second largest, behind only the US, with consumption growing by 10% a year, faster than any other country.

After experiencing rapid GDP growth for more than a decade, Chinese growth is expected to moderate slightly in the coming years as the economy rebalances away from investment and external demand, towards domestic consumption.

Still, strong economic growth, a moderate inflation and a recovery in commodities should continue to support corporate earnings, especially in so-called 'New China' sectors, such as internet, e-commerce, consumer and insurance and provide boost to the stock returns. What's more, the long-awaited inclusion of A-shares in MSCI China will help institutionalise domestic stockmarket, which is the second largest in the world and make the opportunity in A-shares more widely recognised.

According to a report by The Boston Consulting Group (BCG) and AliResearch, the research arm of Alibaba Group, by 2021, will add nearly $2 trillion in new consumption - roughly the size of Germany's consumer economy.

The country is benefiting from an emerging upper-middle-class and affluent households, a younger population that is eager to spend, and e-commerce through digital via digital technology. Income levels in China are rising along with the the population of wealthy consumers and affluent families keen to spend their money on disretionary and luxury goods.

For example, consumption of mid level to high-end products on Alibaba's retail site reached $174 billion in 2016. The younger generation (people aged 18 to 35) made $1.5 trillion dollars of purchases in 2016, up from $700 billion in 2011, and expected to reach $2.6 trillion in 2021.

The Chinese population is extremely connected via digital technology; the time people spend each day on smartphones, laptops, and tablets exceeds global averages. By 2021, more than 90% of purchases will involve at least one digital touch point up from 70% in 2016.

As one of the major drivers of global growth, investors should consider exposure to China when building a balanced portfolio.

Here are ii Rated Investments that give exposure to Chinese equities and the world's best consumer story:

Fidelity China Special Situations Trust provides broader diversified exposure to Chinese equities including H and A shares. The trust is managed by Dale Nicholls since April 2014, who focuses on faster growing, consumer-orientated companies with robust cash flows and capable management teams.

The manager constructs a diversified portfolio of 130-140 high quality stocks from the bottom up and is likely to have a bias to under-researched small and mid-cap space. He is also allowed to invest in unquoted stocks and use gearing to enhance the trust performance.

The portfolio is relatively concentrated, with the top 10 holdings making up almost a half the trust. The largest sectors are IT and consumer discretionary and there are no holdings in banks or property, which are considered to be higher-risk sectors. Since its launch in April 2010, the trust has considerably outperformed both the MSCI China index and its peers.

Janus Henderson China Opportunities Fund is the largest and one of oldest China funds in the UK. Fund manager Charlie Awdry invests in high quality growth stocks, primarily through H - shares, that offer unexpected earnings growth by following an active and unconstrained approach.

The portfolio is highly concentrated around 40 best stock ideas and, typically, has a bias to mid-cap stocks, primarily in faster groing sectors such as consumer and IT sectors. During Awdry's tenure from June 2006 to the end of January 2018, the fund has outperformed the IA sector average and is also ahead of the MSCI China index.

Fund/IndexYTD1 Year3 Years5 Years
Janus Henderson China Opps6.6542.5722.4019.61
Fidelity China Special Sits5.5440.8823.8526.09
MSCI China7.0143.5818.5214.07
Source: Morningstar Direct as at 31st Janaury 2018. Total returns in GBP    

Alternatively, investors could also consider a broader Emerging Markets or Asian funds from ii Rated Investments List that can allocate to and from China as a more appropriate way to invest within the region.

Investors should remember that funds and investment trusts could be placed in an ISA wrapper, meaning they don't incur capital gains tax (CGT) when the funds are sold, and no further tax is payable on any income or interest paid. This means funds within an ISA can grow more than if held outside the wrapper. It is, therefore, sensible to invest as much as possible (current limit £20,000) into ISA each tax year to maximise returns.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.