The trust aims to provide long term capital growth by investment in companies which are quoted on the stock exchanges of Hong Kong, China and Taiwan or which derive a substantial part of their revenues or profits from these territories. In January 2016, the fund’s benchmark was changed from the MSCI Golden Dragon to the more widely used MSCI China.
The long term economic growth story for China is very much still in place with per capita income expected to increase by over 60% over the next ten years to around $12900, significantly crossing the high-income threshold. Alongside this growth, China will need to move up the value chain shutting down capacities in old industries and developing more activities in high end manufacturing, healthcare, education and environmental services. The percentage share of consumption to GDP will rise to more developed country averages.
In the short term, there are also several reasons while I fell it is currently appropriate to supplement existing Chinese exposure.
- Macro factors remain supportive (e.g. GDP growth, money supply, bank liquidity)
- Exports are returning to growth and the consumer remains buoyant
- “Bubbles” in certain real estate areas are being addressed
- Positive trends for corporate earnings revisions
- Attractive valuations, especially on PE and PEG ratios
- Market under owned by emerging and global equity funds
- Risks could include DEBT, government interference and less than ideal accounting, more relevant to smaller companies
The recommended investment trust portfolio (JMC) is concentrated with top ten holdings accounting for 46.4% at the end of November 2017.
- The fund is overweighed in sectors exposed to “New China” with greater emphasis on services rather than manufacturing. Information technology (mainly Tencent and Alibaba) represents over 31% of total assets while “Old China” industries such as Telecoms and Energy are underweighted. This sector bias also goes some way to explain why the trust has significantly outperformed the MSCI China ETF (FXC) over one year and five years.
- Future fund focuses include areas of consumption, healthcare, environmental protection and technology/internet.
- The current trust discount, over 13%, does not seem to reflect the longer-term market potential and although stock has risen about 10% since my February recommendation, it is still recommended for purchase as part of an emerging market allocation.