Should investors follow the PM into China?

Theresa May chose China as her first big overseas trip of 2018 for a simple reason: the prime minister knows that the world’s second biggest economy is set to become even more powerful in the years ahead; and Chinese companies and consumers will be crucial customers. Indeed, as Britain ponders new trade relationships in the years beyond Brexit, China is an obvious place to look. The management consultancy McKinsey expects that, by 2022, 284 million middle-class Chinese will be affluent enough to buy imported goods; that compares with 44 million in 2012.

Should investors be flocking to China in Mrs May’s wake? The country’s stock market, which is increasingly opening up to foreign investors, returned more than 20 per cent during 2017; Chinese shares listed on the Hong Kong Stock Exchange, returned 25 per cent. However, Nancy Curtin, chief investment officer of Close Brothers Asset Management, urges caution. “We have exposure to China in our portfolios but it’s relatively small,” she says. “China’s stock market is still quite immature; its economy is running far ahead of financial market liberalisation.”

Still, Ms Curtin is excited about the prospects. “This is a country in the process of transforming its economy into something much more high-tech and consumer-oriented; the Chinese are hugely ambitious.”

Part of this story is the plan to double the incomes of citizens by 2020. This will be crucial if China’s economy is to be rebalanced towards domestic consumerism and away from mass-production exports. The Chinese government is also investing heavily in innovation, building market-leading positions in industries such as electric vehicles and artificial intelligence. This transformation will create many opportunities for international investors, and be positive for businesses throughout Asia. Western companies, too, stand to benefit from their investment in an economy predicted to grow at 6 per cent annually in the years ahead.

The smart way to get exposure to China is to spread risk across the portfolio. Small holdings in Chinese equities and funds have the potential to grow quickly, but also to be volatile; and many investors worry about China’s indebtedness. Broader Asian funds therefore offer a more diversified way into China as do developed market funds investing in the leading western businesses doing more trade in China.

While the future looks bright for China, the clear message is that investors still should tread cautiously.

The value of investments can fall as well as rise and you may get back less than you invested. Get in touch today to start planning your future or to discuss your long-term financial priorities.

*First seen in The Times, 24 February 2018.