Investing in China: trade wars and a change of name, November 2019

Invesco Hong Kong & China has been on the Chelsea Selection and Core Selection for a number of years. When manager Mike Shiao visited our offices last week, we asked him about the fund’s recent change of name, the opportunities in Chinese A-Shares and the impact of the US/China trade wars.

You’ve recently changed the name of this fund, why is that?

“We changed the name of the Invesco Hong Kong & China fund to the Invesco China Equity fund to highlight changes in our investment philosophy. Previously, exposure to China was largely through investment in securities traded on Hong Kong exchanges, as well as other markets, but the fund will now have increased exposure to Chinese securities through China A shares listed in Shanghai and Shenzhen.

“The Chinese A-Share market was originally for Chinese investors only and B-Shares were for foreign investors. Since 2001, however, the government has gradually been opening both markets to a broader scope of investors, in order to increase investment in Chinese businesses.

“Historically we’ve had access to A-shares with a 20% limit, but we can now, in theory, invest up to 100%. But that doesn’t mean we will invest that much, or even 50%-60%, we just have the flexibility to do so. We currently invest around 16% in A shares. This compares to 8-9% for the MSCI China Index - although we expect the allocation in the index to rise to around 12% by the end of the year.”

What impact are trade wars having the region?

“As is the case with Brexit in the UK, you are seeing some investors delaying investment into China due to the trade conflict, while other countries, like Vietnam, are also benefiting from more direct foreign investment.

“However, this is still a small impact on China’s own foreign investment. Even some of those companies’ in Vietnam are actually China-owned, meaning money will come back to China for consumption.
“Essentially, the attempts to repress China are not working and it will continue to strengthen. We also have to consider the US is under more pressure politically, as it has a four-year electoral cycle. It has harder to get re-elected if an economy is slowing as the US is. China has not got the same worries – it can afford to wait.

“Overall, we are seeing companies become more conservative due to both trade wars and the slowdown in the Chinese economy, but fundamentally we are not seeing this translate to company earnings from a negative perspective. It is important to recognise that this fall in growth to 6% or less is down to the Government’s determination to try and control credit growth.”

How is the portfolio positioned at the moment?

“We specifically target stocks we feel are undervalued by about 25-30% and we hold them with the expectation they will reach fair value over a three-year time horizon - although we like to hold companies for up to five years. We only like to sell if a company reaches fair value ahead of that point.

“We are currently overweight towards consumption-led sectors, as China moves away from being so export focused. The market is huge with major income growth, hence our focus on the consumer-based sectors. We’ve also built an overweight in healthcare as the challenges of both a growing and aging population have a greater influence on the economy.

“Where we are underweight is towards the likes of the financials and energy sectors. For example, with a slowdown in the Chinese economy, the Chinese banks are being asked to lend to small and medium enterprises, so we believe their interests are not currently aligned with the investor. We have a stronger preference for the private investor.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mike's views are his own and do not constitute financial advice.

Published on 18/11/2019