Funds with exposure to China and Asia are being punished today at the hands of another stock market rout, which resulted in many Chinese shares being suspended from trading after dramatic falls. Today's stock plunge tripped a new 'circuit breaker' system designed to limit volatility. The technology-heavy Shenzhen Composite fell 8 per cent, China's CSI 300 index fell 7 per cent before shares were halted from trading and the Shanghai composite index fell by 6.9 per cent. We take you through the funds likely to be most hit and how managers are responding.
How bad is it?
Open-ended fund data are yet to come through but investment trust share prices and exchange traded funds (ETFs) tracking Chinese indices have already moved. Fidelity China Special Situations was down 4.9 per cent before the end of trading today and JPMorgan Chinese Investment Trust (JMC) was down 4.2 per cent. Meanwhile, ETFs tracking the CSI300 index had dropped by almost 10 per cent before the close of play and others, including the iShares China Large Cap UCITS ETF (IDFX) and db x-trackers MSCi China Index UITs ETF (XCX6), were down by under 5 per cent. The impact echoes the pain felt by China and Asia funds during China's Black Monday last year.
Why have markets plummeted?
The key triggers for this latest market crash have been the release of weaker manufacturing data than expected over the weekend and the impending end of a ban on stock sales by large shareholders imposed last year. Because China's domestic markets are more than 80 per cent made up of private retail investors they are liable to large swings and sentiment-driven panic.
Market watchers think retail investors were keen to get out of stocks before they are sold by large investors who have been banned from exiting since the crash last year, combined with more nervousness around China's long-term slowdown.
Which funds are most affected?
Although UK investors will be affected by the China rout, they will not feel the full brunt of the domestic market crash. Onshore 'A' shares traded on China's Shanghai, Shenzhen and CSI 300 indices are the worst affected, as opposed to the offshore stocks held by most investors. Most fund managers invest in 'H' shares, traded in Hong Kong, and American Depositary Receipts (ADRs), American-listed Chinese stocks, both of which have fallen less than the 'A' share market. Although by no means immune to the impact, they are not as turbulent and there is reason to believe that many of the stocks are a safer bet in the long term.
The funds most liable to feel immediate pain are ETFs tracking the CSI 300, such as Lyxor ETF CSI 300 A Share (CSIL), down almost 10 per cent before close of trading on Monday, and db x-trackers CSI300 UCITS ETF 1C (XCHA), down 8.8 per cent.
Next in line are the funds and trusts with the most exposure to 'A' shares and 'B' shares. Those include Fidelity China Special Situations (FCSS), which currently has over 21 per cent exposure to 'A' shares. Manager Dale Nicholls has been stubbornly holding onto his positions since the last market drop in the belief that the market will regain ground.
| China investment trusts | % A-share exposure |
| Fidelity China Special Situations | 21.4 |
| JPMorgan Chinese | 9.0 |
| China funds | % A-share exposure |
| Baring China Select | 6.8 |
| Fidelity China Focus | 9.6 |
| Fidelity China Opps | 0 |
| Fidelity China Consumer | 2.3 |
| Henderson China Opp | 5.9 |
| Jupiter China | 0 |
Source: Fund providers, as at 4 Jan 2015
Open-ended funds have not been priced for the day and so the immediate impact is not yet known. But those with high weightings to 'A' shares include Fidelity China Focus (LU0457959939), with 9.6 per cent exposure and Baring China Select (IE00B8BY9984), with 6.8 per cent exposure.
How are fund managers responding (and what are they buying)?
Managers claim that investors should remain calm and see this is an opportunity rather than a threat to buy good stocks at cheap valuations. But in a crash like this all stocks and funds tend to be affected and the whole market is likely to be hit by volatility this year.
"On a day like today there is really nowhere to hide," says Charlie Awdry, manager of Henderson China Opportunities (GB00B5T7PM36). "But longer term there are positions you can add to."
Ross Teverson, manager of Jupiter China (GB00B3ZPHC12), says investors should remain calm and look at the long-term performance of China funds. His own managed to return a positive result in 2015 despite August's market crash and he argues that steering clear of the A-share stocks most liable to market crashes is the answer.
He says: "In the very short term it is difficult for any individual stock to decouple from the overall stock market. But one of our top 10 holdings, Hong-Kong listed Boer Power, was up slightly today and if you look at earnings forecasts some companies have seen a very stable outlook for forecast earnings in 2016. So China is a multi-faceted economy and there are companies which can prosper.
"In the August crash last year a number of good companies got dragged down by the overall sell-off in China and emerging markets but subsequently recovered. For example, China Distance Education [a foreign-listed stock] saw its share price drop to $8 but it is now back up above $14."
Managers say that even in the worst-affected 'A' share market, there are names they like. Mr Sutherland says: "The smaller Shenzhen-listed tech stocks drove the crash last year rather than the big blue-chip names we tend to invest in, including stocks like Shanghai Auto."
Mr Awdry points to Kweichow Moutai. "It is a high-end spirit which Chinese traditionally drink and with a market capitalisation of 263bn RMB. It is now trading on 14.3 times 2016 earnings which is pretty cheap, comparatively speaking. So there are individual equities that foreign investors will look to buy and those will be very different to what the domestic retail investors like."
He also says Fidelity added to positions in US-listed Chinese stocks Alibaba and Baidu in August, when they were hit with the crash and opened up down 20 per cent.
What action should you take?
If you are worried about your own exposure, take a look at the type of shares you own. Different indices will be affected to different extents and there is not necessarily any need to panic.
However, there is no doubt that China will continue to be a difficult market this year and if your capital is too important to lose, this might not be the market for you.
Jason Hollands, managing director at Tilney Bestinvest, says: "While long-term investors should not get distracted by short-term, day-to-day market noise such as a single bad day on the markets and it is yet to be seen whether this proves to be a storm in a tea cup or the start of a more drawn out downward shift in risk asset prices, we do think that 2016 is likely to be a volatile year for the markets." China remains "at the apex of our concerns," he added.
