It’s no secret China’s economy is in trouble. The country has struggled to convincingly recover from the pandemic, and its revered property market is in crisis.
However, history tells us the best time to buy into a stock or market is during periods of weakness.
It’s difficult to say whether China is past peak pessimism or whether it is still to come. What we do know is that we are very near it. We also know China’s broad equity market trades at about 10x earnings—a massive disparity with developed market valuations and below China’s historical average.
China as an investment prospect is interesting because it’s difficult to imagine sentiment around the country becoming much worse. Failing a black swan event, the shortcomings of the Chinese economy are ingrained in the current narrative, and this is reflected in its equity market.
For the equity market to rally, the situation doesn’t necessarily need to dramatically improve; it just needs to stop getting worse.
There’s a weight of evidence to support that’s where we are now. Chinese equities have already moved materially higher, but there’s a long way to go to return them to historical levels.
Investors have many options for investing in China. We chose to select actively managed Investment Trusts to help reduce exposure to the undesirable parts of the Chinese equity universe and because you can buy these trusts at a healthy discount to NAV.
Baillie Gifford China Growth Trust
Trading at a 9.3% discount to NAV, the Baillie Gifford China Growth Trust offers investors a very well-diversified portfolio benchmarked to the MSCI China All Shares Index.
Both the index and the trust’s NAV have declined materially over the past year as macroeconomics ravaged Chinese equities.
The trust underperformed the index heavily in 2023 due to an underweight position in the energy sector and an overweight position in consumer discretionary. During the financial year to 31st January 2024, the trust’s share price total return fell 40.9% compared to the benchmark.
Looking back at performance since 2019, this trust typically outperforms when the index rises and underperforms when it falls. Should Chinese equities rally from here, one would expect this trust to outperform the index.
A notable holding that demonstrates Baillie Gifford’s willingness to do things differently is the presence is BtyeDance, the owner of TikTok, which isn’t included in the benchmark’s top ten holdings. Accounting for 8.2% of the fund, BtyeDance adds exposure to the fastest-growing social media platform – very apt for a manager focused on growth.
The trust is managed by Sophie Earnshaw and Linda Lin, both members of Baillie Gifford’s China Equities team and decision makers on the All China strategy.
JP Morgan China Growth & Income
As the name would suggest, the big difference between JP Morgan China Growth & Income and the Baillie Gifford trust is the dividend. JP Morgan China Growth & Income provides its shareholders with a 5.4% yield at current prices.
The trust has cut the dividend heavily in recent years as Chinese equities faced mounting pressures and the portfolio’s NAV took a hammering.
Its discount is narrower than Baillie Gifford’s trust at 6%, and this is likely a reflection of the dividend yield, but of course, it means investors don’t have as much of an opportunity for capital appreciation should the discount narrow further.
The trust is heavily overweight Tencent with an 11.5% allocation of the portfolio to the stock; Tencent accounts for 15% of the trust’s chosen benchmark. This appears to be a deft move with the stock up 24% so far in 2024 and delivering healthy increases in the trusts NAV.
JP Morgan China Growth & Income uses the MSCI China Index as a benchmark, which is different from Baillie Gifford’s MSCI China All Shares Index benchmark. This doesn’t have much bearing on portfolio construction but is an important consideration when comparing performances against the benchmark. For example, Tencent is the biggest constituent of both benchmarks but accounts for 15% of one and only around 9% of the other.
JP Morgan China Growth & Income has a notable leaning towards financials with positions in China Merchants Bank. This deviates from the benchmark and is a major differentiator with Baillie Gifford’s portfolio.
This trust also had a tendency to move much more quickly than the benchmark and has suffered dearly over the past couple of years. Like the other trust in this article, JP Morgan China Growth & Income is well placed to benefit from a continued rally in Chinese stocks.
