Conal Gregory: China offers huge potential to investors with the courage to take a few risks

LAST weekend, China ushered in the Year of the Tiger. According to the Chinese calendar, the animal represents courage, but it can also be impulsive and rebellious. China is likely to become the world's second largest economy this year and – according to Goldman Sachs – overtake the US by 2027. GDP growth last year was a stunning 8.7 per cent and saw the country pass Germany to become the globe's greatest exporter.

Scott Mackintosh, from Edinburgh Investment Consultants, likes the long-term prospects for investing in China but is cautious that the market may experience some downward correction, notably in property, and that inflation and bad debts over the next 12-18 months may cause problems.

Mackintosh tips Schroders Asian Fund. "The key message for investing in China is to forget the index, which is full of oil companies, dull mature telecoms firms and Government-run banks, as stock picking is key," he says.

Peter Dalgliesh, manager of the Pacific Assets Trust at F&C, holds 36 per cent in China. His favoured themes are healthcare, education, internet and insurers. He recognises that rising inflation, the risk of higher interest rates and tightening administrative measures are concerns.

The demographics of the Chinese population will have "a significant effect on increasing demand at home to counter any potential slowdown on the export front," advises Alex MacLean of Aspire Wealth Management in Edinburgh.

He feels the politics are slightly less predictable, which adds another dimension to the risks of investing in east Asia, particularly China, and therefore says to go for "tried and tested" funds, notably First State Great China Growth and Fidelity South East Asia, managed by Martin Lau and Allan Liu respectively.

Grant Walker, of Edinburgh Risk Management, says: "There remain concerns (in China] about corporate governance and, more widely, about the predominant role of the Communist party and the lack of civil liberties. There will need to be further change in these areas before the need for an investment risk premium is removed."

For clients who accept that this is a potentially volatile market, Walker likes both First State Pacific Leaders and Neptune China funds, particularly the former which, he says, "offers a better balance as it is not concentrating on the stock market of one country". Currently it has 32 per cent invested in China.

Gartmore's Chinese Opportunities fund, which is 'A' rated by Standard & Poors, is recommended by John Mortimer at the Edinburgh-based Muirfield Partnership. Managed by Charlie Awdry, the fund moved in 2008 from a defensive position to a recovery one, resulting in over 53 per cent return last year. The smaller, similarly 'A' rated Jupiter China fund is also tipped by Mortimer. He says: "It adopts a more thematic approach which has resulted in an incredible 75.31 per cent return over the past 12 months."

Mortimer feels that both funds, although higher risk, complement each other and could constitute up to 10 per cent of a portfolio depending on the client risk profile.