Analysts at Bestinvest believe the Chinese economy is about to enter a phase of slower growth as policy makers battle with the country's unbalanced economy. Therefore, the investment advisers' focus is on funds with a low weighting there - and its key recommendation is First State Global Emerging Markets Leaders, one of our Top 100 funds.
Emerging markets equities have fallen from favour in a risk-averse world and their once premium valuations have declined as a result. But Bestinvest believes that current valuations offer a great entry point for investors with a time horizon of more than five years. Ben Seager-Scott, senior research analyst with Bestinvest, says: "With emerging market equities now trading at attractive valuations, we believe these economies deserve renewed attention from investors."
The First State Global Emerging Markets Leaders fund is well diversified and features high-quality companies with long-term growth prospects. Examples include Taiwanese food company Uni President Enterprises and the consumer goods business Tiger Brands, which operates mostly in South Africa. As fund manager Jonathan Asante is cautious on China, the fund has little exposure there. First State Global Emerging Markets Leaders currently has 8.4 per cent of its portfolio exposed to China, compared with the 17.3 per cent allocation in the MSCI Emerging Markets Index.
Since launch on 1 December 2003, the fund has returned 280 per cent compared with 210 per cent from the MSCI Emerging Markets Index. It has also beaten this benchmark by significant margins over the past one, three and five years. Its total expense ratio of 1.58 per cent seems reasonable in this context.
Investors already holding UK-listed shares should look for overlaps with their direct share portfolio. For example, the fund has a 3.8 per cent exposure to global consumer brands provider Unilever.
However, other emerging markets funds among our Top 100 selection have a more positive stance on China.
Dr. Slim Feriani, manager of Advance Developing Markets Fund, which has 14 per cent exposure to China, says: "The Chinese economy is set to grow at 7 per cent next year with a move to grow consumption and service industries and higher value-added manufacturing and make them the driving force in an economy moving away from garments, toys and low value-added manufacturing. The average price to earnings ratio of the MSCI China index is about nine times for 2012 and lower for 2013, so not expensive - but earnings growth is small for 2012 and just 11 per cent for 2013. We are still of the opinion that there will be a soft landing in China, that the bad news is reflected in the market and that the new leadership will want growth to continue and will support the economy by faster easing of monetary policy.”
Richard Titherington, manager of JPMorgan Global Emerging Markets Income, which has 9 per cent exposure to China, says: "We are keeping our positions in China as sentiment is extremely negative and our valuation models indicate real value. The focus of the bear case has centred on real estate and, even as policy tightened (2010) and then stayed stubbornly tight (2011-12), it is striking that real estate experienced a normal correction rather than a crash. Consequently, we continue to believe that the China cycle has been driven by policy rather than a structural imbalance. As a result, we expect a U-shaped recovery, not an L-shaped one, with policy turning more supportive after the appointment of the new Standing Committee in October."
How our Top 100 funds compare on China exposure
Source: Investors Chronicle
First State Global Emerging Markets Leaders Top 10 Holdings
|Samsung Fire & Marine||4.1|
|President Chain Store||2.6|
|Uni President Enterprises||2.5|
|Hong Kong & China Gas||2.3|
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