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How the Chinese crash hits your portfolio

The Chinese stock market is having a torrid time. Are you affected and what should you do?
August 6, 2015 and Leonora Walters

After a meteoric rise, Chinese stocks have crashed back to earth with a bang. In mid June Chinese stocks were trading at seven-year highs, but by Monday 27 July the market was experiencing its biggest fall since 2007. If you are worried about your exposure, what parts of your portfolio might be taking heat and how concerned should you be? We look at the outlook for the region and take a microscope to some of the worst-hit funds.

How might the crash affect you?

China's restrictions on foreign access to its markets means that there is no need to panic but you might have more exposure to the region than you think.

 

How badly have Chinese funds been impacted?

Even if you hold Chinese equity funds that invest in domestic stocks, your investments will not be experiencing the full brunt of the crash. China's long-time reluctance to allow foreign investors access to its own stock exchanges has meant Chinese equity managers hold the majority of their assets in 'H' shares, Chinese stocks listed on the Hong Kong exchange, rather than domestic'A' shares, which carry restrictions.

H shares have been affected, however. Of the sterling share China equity funds, Jupiter China (GB00B3ZPHC12) and Fidelity China Special Situations (FCSS) are among the worst affected, with Jupiter losing 12.2 per cent and the Fidelity trust falling by 11 per cent in a month. Threadneedle China Opportunities (GB00B846CP88) also lost 10 per cent in the last month and JP Morgan Chinese Investment Trust (JMC) fell by 10.8 per cent. HSBC Chinese Equity (GB0000204395) also lost 11.1 per cent. over the same period.

Although most funds and trusts invest mainly in H shares, some do have exposure to A shares through licences or through the Shanghai Hong Kong Stock Connect programme launched last year. Fidelity is one of those, with around 18 per cent exposure to A shares via its QFII licence and 79.8 per cent invested in China in total. However, fund manager Dale Nicholls is holding on to those positions in the belief that the market will swing back. JPMorgan also had a 5.74 per cent allocation to A shares at the end of June as well as a 31 per cent weighting to H shares.

 

 

What else in my portfolio might be impacted?

If you hold Asia Pacific funds, both ex-Japan and including Japan, you are also likely to have felt some pain from the market rout. Juliet Schooling Latter, research director at Chelsea Financial Services says: "Investors should look at their fund benchmark. An Asia fund will track the MSCI Far East ex Japan, which has around 32 per cent in China and 14.8 per cent in Hong Kong. If your fund is benchmarked against the MSCI Asia ex Japan you're looking at 28 per cent in China and 13 per cent in Hong Kong."

Of Asia Pacific ex-Japan funds, GAM Star Asia Pacific Equity (IE0003000563) is one of the worst performers over the short term, with a 10.3 per cent loss between 12 June and 27 July according to Jason Hollands, managing director at Tilney Bestinvest. It has over 56 per cent in China and Hong Kong. M&G Asian Fund (GB00B3T2RX98) fell by 6.55 per cent in that time and has lost 13.2 per cent in three months. But according to Trustnet, over three months Templeton Asian Growth (LU0229940183) has lost more than any other open-ended Asia ex-Japan fund, at a loss of 18.8 per cent.

Ms Schooling Latter says: "Over three months the GAM fund is down over 16 per cent (to 29 July) and Blackrock Asia (GB00B7VS6Q92) is also down over 16 per cent so they have been among the hardest hit." Blackrock Asia is at the higher end of exposure to China and Hong Kong, with over 47 per cent invested across both markets.

Other funds with large exposures to the region include Liontrust Asian Income (GB00B7BZB324), at around 42 per cent and Schroder Asian Alpha Plus (GB00B5V2VR34), with more than 50 per cent invested across the area." Both have lost over between 8 and 15 per cent in the past three months but not as much as others with lower exposure.

Funds with lower exposure to the region have not suffered such drastic drops. Ms Schooling Latter likes JO Hambro Asia ex-Japan Small and Mid Cap (IE00B6R5LS41), which has just over 23 per cent exposed to China and Hong Kong and is down by just under 1 per cent according to FE Trustnet. JO Hambro Asia ex Japan (IE00B3RQ2721) also has 31 per cent exposed to China and Hong Kong and is down by 7.2 per cent in three months.

She says: "(IC Top 100 fund) First State Asia Pacific Leaders (GB0033874214) also has low exposure, at 18 per cent as they've been negative on China for quite a while and were more bullish on India than China."

 

Emerging markets funds

Emerging markets funds could also have a high weighting to China. The country makes up 24 per cent of the MSCI Emerging Markets index and 28 per cent of the FTSE Emerging index. Several emerging markets funds do have exposure to A shares too. Adrian Lowcock, head of investing at AXA Wealth, points to Fidelity Emerging Markets Fund (LU0251123260), which has a 2 per cent exposure to China via A shares at the end of June with the rest held in Hong Kong (12 per cent) and Taiwan (6 per cent). The fund fell by over 16 per cent in the past three months.

 

Where could you go instead?

For investors looking for an alternative to China, India could be a good bet. Ms Schooling Latter says: "Managers are saying that India has taken over as an engine of growth. India is very different to China in almost every respect but actually there's a lot of entrepreneurialism," though she adds it is "not cheap".

First State Asian Pacific Leaders is overweight India. 24 per cent in India versus 7 per cent of the index. Ms Schooling Latter also highlights Jupiter India (GB00B2NHJ040).

But Mr Lowcock warns against getting out of China in a panic. He says: "Think first about why you want to take money out, it might be that you've just realised it's too risky in which case I'd suggest a more diversified emerging markets fund which will spread risk across China, India, South Africa, Brazil, Russia and others or to look at an emerging markets income fund with a more fundamental stock analysis approach. JPMorgan Emerging Markets Income Trust (JEMI) is a good example of that.

"If you're investing in China you really have to be investing for the longer term - 10-years plus - because these markets can be very volatile and can also be very much out of favour for long periods of time."

Bear in mind too that despite the short-term losses, many China and Asia funds have rallied by an enormous amount before this crash and many investors will still be sitting on gains in the year to date. The oldest share class of Invesco Perpetual Hong Kong & China Acc (GB0033028332) is down over 14 per cent over three months, but Ms Schooling Latter says: "You're still sitting on a 7 per cent gain over a year so these things need to be taken in context."

China: the professionals' view

Although Chinese equities have experienced severe turbulence over the past month, professional investors are not overly concerned, though expect more turbulence.

Adrian Lim, manager of IC Top 100 Fund Edinburgh Dragon Trust (EFM), says:

"The market volatility is likely to continue as investors test the resolve of the Chinese authorities to intervene to provide price support. The decline in the stock market is a reflection of wider issues concerning investors in China, including liquidity/credit fuelled bubbles and the transition from an export-led to a consumption-driven economy. Given the importance of the Chinese economy to regional and global growth the current situation is a concern. The authorities are committed to managing the situation but it is unquestionable that China's development will be bumpy.

"We remain underweight China. While 7 per cent a year economic growth since the early 1990s is compelling, the performance of the stock market - despite the recent rally - has been sluggish. Corporate governance, transparency and quality of management have also been concerns when looking at local companies. We prefer to obtain exposure to China's economic story via Hong Kong-listed companies, or those listed elsewhere with a significant proportion business coming from onshore China.

"The declines in China's stock market have also been reflected in share price falls elsewhere in the region. So while we may not be adding to our positions in China we are certainly taking the opportunity to top-up on some favoured names around the region that are trading on more attractive valuations."

Howard Wang, manager of IC Top 100 Fund JPMorgan Chinese Investment Trust (JMC), believes that the market may remain volatile in the near term given the uncertainty surrounding the exit plan from the recent price-keeping operations.

"That said, in the medium term, we do not see much change in overall policy direction to support economic growth," he says. "With the recent strong pick-up of local government debt issuance and improving property sales, construction activities should pick up.

"It is also important to distinguish between the performance of A-shares and offshore China, as proxied by MSCI China. The domestic A-shares market is still predominantly driven by local investors - foreign investors own only around 2 per cent of the market cap of the Shanghai market. The recent corrections were largely in the domestic A-shares market, while MSCI China was relatively resilient. For example, when the Shanghai Composite dropped 8.5 per cent in one day recently, MSCI China only declined 4.3 per cent.

"We are not making any major changes to the portfolio and maintain our preference for structural growth sectors including IT, healthcare, household durables and tourism, as well as those segments which should benefit from reform. We are cautious on industries that are prone to earnings pressure like brokers and selective energy, and materials.

"Given a nearly 80 per cent surge in the domestic A-shares market over the 12 months to June, we had expected that there might be corrections. The slump is not all bad news as valuations have now corrected."

Charles Jillings, manager of IC Top 100 Fund Utilico Emerging Markets (UEM), says that "China's market volatility is a concern as it reflects stresses in the system and these are difficult to correctly read. However, as long-term investors we look for good investment opportunities rather than trying to time the market. We sold out of six positions during the strong rise in April and have recently re-invested on market weakness.

"We reduced our investment in China significantly in April, as well as our bank debt, but China remains a big part of our portfolio. We are taking the correction as an opportunity to buy, but selectively and only where we see long-term value. Our investments are focused on middle class growth and infrastructure delivery - assets such as airports, toll roads and communications, and in China gas distribution and waste treatment. We expect medium to longer growth in this area."

Lars Kreckel, equity strategist at Legal & General Investment Management, thinks China's stock market falls are an isolated event that won't significantly impact international markets.

"Few domestic investors have access to international stocks so it's unlikely we'd see redemptions in other markets or assets to shore up losses from Chinese equities," he says. "The behaviour of wider Chinese markets and the economy is certainly one of the risks we keep a close eye on, but a hard landing as a result of the equity bubble imploding looks unlikely."

Leonora Walters

Peformance (% cumulative total return) of Chinese funds

China fund 1m3m6m1yr
HSBC Chinese Equity -11.1-20.1-2.814.4
Jupiter China -11.0-17.9-1.57.7
Threadneedle China Opportunities-10.0-18.2-3.411.3
Fidelity China Special Situations-12.3-20.3-1.121.4
JP Morgan Chinese -10.8-24.6-12.60.3

Source: FE Trustnet, as at 30 July 2015