Virginia Faulkner: Don’t overdo it with China

Published on 19/02/2012 00:00

JANUARY 23 heralded the Chinese Year of the Dragon. The Dragon is supposed to symbolise good luck, and it is certainly true that many investors are feeling confident about the prospects for investing in China this year.

The Chinese economy isn’t burdened by the huge debts of the Western world and the region’s ongoing economic growth story is indisputable. Even though growth in the fourth quarter of 2011 fell to 8.9 per cent, the lowest figure in China for more than two years, this sort of figure is still something that Western economies dream of.

However, strong economic growth doesn’t necessarily translate into strong stock market performance, as we saw in 2011 when China was the worst performing of all investment sectors, falling by 22 per cent.

It is therefore important that investors don’t get suckered into any hype regarding China. Investing in China is and will remain a high-risk occupation. This is demonstrated by the performance of Chinese funds, which rose in value by more than 50 per cent in 2007 and 2009 and by 14 per cent in 2010, yet fell by 32 per cent in 2008.

Following the stellar performance of 2009, investors’ interest in China reached fever pitch in 2010. This culminated with “star” fund manager Anthony Bolton launching the Fidelity China Special Situations Investment Trust, which quickly raised £430 million, making it the biggest ever investment trust launch in the UK.

Many people invested with Bolton and felt vindicated initially as the Chinese sector continued to rise and Bolton’s fund recorded a gain of over 20 per cent in its first six months. However, the fund has headed downhill and, despite a recent bounce, those who invested at launch now sit on a hefty loss.

There is undoubtedly strong potential for stock market growth in China, but this will continue to be coupled with high levels of risk and volatility, so investors need to think carefully about how to invest in the region. Most shouldn’t risk specific exposure to China for more than a small amount of their investment portfolios.

Perhaps a sensible way to invest, while diversifying some risk, is through broad-based emerging market funds. Many emerging markets funds have between 15 per cent and 25 per cent of their holdings in China and good options include First State Global Emerging Market Leaders, JPM Emerging Markets and Schroder Global Emerging Markets.

Investors should also recognise that a number of other funds, including UK funds such as AXA Framlington UK Select Opportunities, and global funds such as M&G Global Basics, are positioned to try and benefit from further economic growth in both China and the emerging markets.

Meaning some may inadvertently have significant exposure to the Chinese growth story through “non-Chinese” investments they already hold. Increasing their exposure through direct investment into China will therefore increase their risk.

• Virginia Faulkner is an IFA with AWD Chase de Vere