While investing in China, or any emerging market, is a long-term game, the story over three and five years is just as stark, with the sector down 49% and 16.5%, respectively. The economic picture is just as uninspiring, as China faces the prospect of lacklustre growth in 2024, with GDP expected to grow 4.5% in real terms, compared with 5.2% in 2023 and 6+% levels in the years before the Covid pandemic. It is little surprise then, with funds under management of just £3.7bn, according to the IA over the course of 2023 to November, the IA China/Greater China sector saw outflows of close to £188m.

So as all eyes focus on China as it enters the year of the dragon, is it really all bad news? In this  head to head, James Klempster (pictured left), deputy head of the Liontrust multi-asset team, explains why he is becoming more optimistic towards China, while Andrew Mattock (pictured right), portfolio manager at Matthews Asia, calls for patience from investors.

James Klempster, deputy head of multi-asset, Liontrust

As long-term, disciplined investors, we are focused on identifying investment opportunities rather than being distracted with macro stories. While a positive economic backdrop should provide a tailwind to markets, fundamentally poor investments are unlikely to prove rewarding, even with a metaphorical gale at their backs.

Over the past 20 years, investors in Chinese stocks have regularly conflated a positive view on the economy with a positive view of the stockmarket, but history has often shown this to be a poor strategy. There are many hazards that can impact markets even against a benign, positive macro backdrop. Important factors to consider include corporate governance: whether there is a genuine culture of rewarding shareholders, and whether capital controls could hinder your ability to retrieve your investment in the future. Even if the above factors are in your favour, investing at the wrong price can mean you’re pushing a rock uphill to get returns.

See also: Head to head: The prospects for global equities in 2024

Similarly, the separation of an investment case from the macro story is equally important when news flow is universally negative. While the Chinese economy is in the doldrums and experiencing an insipid recovery, it does not necessarily follow that the stockmarket should also be written off.

The draconian Covid lockdowns followed by a surprise reopening, political crackdowns on ostentatious wealth, education provision and the property sector have all led to a degree of growing caution among investors, catalysed by a flaring of geopolitical risks.

The combination of Covid, political and corporate developments have acted to rein in globalisation, with heightened geopolitical risk arising from tensions in the Middle East and the ongoing Russian-Ukrainian war further accelerating this contraction. On top of this, China faces demographic headwinds with a declining population and an ageing workforce.

Glimmer of hope?

However, not all economies are created equal, and a poor year for China will still see growth outstripping much of the developed world. The Chinese government continues to focus on improving GDP per capita and moving its economy steadily towards higher-margin, value-adding industries such as electric cars and other technologies.

The latter can, of course, cause alarm, stoking concerns surrounding national security, with governments such as the US having a sceptical view of Chinese technology giants. And while the frosty Sino-US relationship has thawed slightly of late, the US government clearly wants to reduce its reliance on Chinese inputs into its supply chains.

Emerging markets’ poor performance over the past two to three years has a lot to do with problems stemming from China. But now China has adopted a more pro-growth, stimulus-oriented stance, emerging markets could benefit from the relative appreciation of their currencies versus a weakening dollar. They will be further boosted by international strategic supply chains being re-opened.

We do not have direct exposure to Chinese equities through a dedicated fund: an important consideration in our portfolio construction is the avoidance of an over-concentration to any countryspecific risk. Instead, we prefer to access the market in our global diversified portfolios through allocations to Asia ex Japan and emerging markets funds.

Indeed, through our overweight positions in these regions, we are currently overweight in China. Undoubtedly, there are some interesting China managers, but for us to back these strategies, we would like to see a greater number of Asia ex China and emerging markets ex China funds to avoid doubling up on our Chinese allocation.

Overall, we believe valuations on Chinese stocks remain attractive and this will prove rewarding for investors against a more forgiving economic backdrop, as indeed it will for other emerging markets and Asia ex Japan. The main driver of returns will come from the re-rating of stocks from their lowly valuations, which should follow any shift in sentiment from the current levels of scepticism that is keeping a lid on pricing.

Andrew Mattock, portfolio manager, Matthews Asia

Last year was a disappointing one for Chinese equities and the Chinese economy overall. It’s disappointing, in our view, not just in the sense of the underwhelming recovery of Chinese consumer spending post-Covid lockdowns, but also due to the lack of any significant stimulus measures by the government.

Although the government did start to gradually loosen property purchase restrictions across most cities in China, the expectations of potential home buyers regarding future house prices and their own income levels have changed. As a result, these policy changes barely helped to arrest the slump in the real estate market. As the year progressed, investors gradually gave up on the idea that the Chinese central government would step in to engineer a stronger consumption rebound.

From what we can see, many entrepreneurs – whose animal spirits were curbed during the Covid period – are now hesitating to start any new investments in this environment. From a geopolitical standpoint, the highly anticipated Biden-Xi summit in San Francisco in November didn’t really impact the ongoing concerns of the market. And staying at the macro level, Chinese equites were a key exception in a November global equities rally that followed signals by US Federal Reserve chair Jay Powell that the US interest rate-upcycle was near an end.

Both domestic and international investors have had their confidence severely tested over the past three years. There is no ‘natural’ inflow into China’s market through pensions or retirement savings plans and that has left only selected groups of companies with strong cashflow and balance sheets being active in the market, buying back their own shares.

Although we don’t fully subscribe to the theory of a ‘Japanification’ of China, we believe the government needs to do a lot more to avoid this trap and the risk of a ‘lost decade’.

Looking ahead, we remain cautiously optimistic that there will not be further meaningful deterioration in the property market. While we do not expect significant warming of geo-relations, the current status quo of a more constructive post Apec posturing would be welcomed by the market. Patience is a virtue

Among the traditional drivers of Chinese economic growth, aside from real estate, the export sector is still demonstrating some strength. However, as China grows its share of global industrial output, it raises the spectre of more trade frictions alongside continuing US tariffs.

In terms of consumption, the third economic driver, Chinese consumers are likely to continue to behave very conservatively due to a lacklustre employment market and bleak outlook for income growth. Industries with high-paying jobs have unfortunately become casualties of tightened regulation and some have been subject to pay-cut directives from the government.

Valuations continued to trend down in 2023, and the broader China market hovers around similar levels as 2009, despite a better-quality businesses and earnings profile.

We continue to believe that patience is needed in these market environments and that it will ultimately pay off once the market turns. In the current environment, we continue to stick to our knitting and deliver a consistent growth at a reasonable price strategy for our clients.

This article was written for our sister title Portfolio Adviser’s February magazine.

A study by AA Financial Services found that 85% of British adults spent considerably less during lockdown. Monthly fuel bills fell by an average of £49; people saved £57 ($73, €68) by not venturing out to the pub or a restaurant and pocketed a further £53 by avoiding the high street and spending online instead.

On average, households found themselves more than £600 a month better off, prompting almost one third (31%) of adults to increase their level of savings.

According to wealth management firm Investec, over the course of 2021, Britain’s ‘excess savings’ soared to £185bn, up £73bn or 9% of GDP, the equivalent of £6,600 per household.

‘Excess savings’ are not a new phenomenon; economists maintain that an increase in the propensity to save is primarily a consequence of the prolonged global decline in interest rates, a theory mooted in 2005 by former US Federal Reserve chairman Ben Bernanke who identified a ‘global saving glut’ as the principal explanation for low interest rates.

A closer look at the distribution of ‘excess savings’ accumulated during the pandemic shows that they have mostly accrued to high-income households, a cohort displaying a much lower propensity to spend from income or wealth compared with their lower income counterparts.

Indeed, a survey by accounting group NMG suggests that only 10% of households whose lockdown savings increased intend spending them, whereas 70% prefer to keep their savings in bank accounts. But one-fifth plan to use their savings to top up their retirement plans, invest or reduce existing debt.

Property market

The role of property in this unfolding economic scenario cannot be ignored.

Historically, homeowners feel wealthier as property values rise, even though they may have little or no intention of selling. As house prices increase homeowners become more confident, resulting in higher levels of both investing and spending.

There’s little doubt that homeowners have emerged from the pandemic in much better shape, financially-speaking, than they were in late 2019. According to the Office for National Statistics (ONS), between January 2020 and January 2022 average house prices rose to £273,762, a 17.6% increase.

This combination of ‘excess saving’ and regular, authoritative confirmation that their homes are worth significantly more than they were pre-pandemic is a powerful incentive for people to convert a proportion of their pandemic-induced savings into longer-term investment. The motivation to invest is reinforced as we appear to be entering a prolonged period of rising inflation, interest rates, fuel costs, utility bills and various forms of local and national government taxes.

Financial advisers are mindful that many existing investors wish to use the current ‘excess saving’ opportunity to top-up an existing pension or to create a new, private pension, such as a Sipp, and thereby benefit from immediate tax relief on contributions up to a maximum of £40,000. A smaller number of investors may prefer to transfer to a different Sipp platform, but there is one additional pension-related opportunity of which a sizeable number of investors can take advantage.

Few savers regularly make full use of their annual pension contribution allowance, although the evident scale of excess savings presents them with a perfect opportunity to rectify this.

Carry forward

As a result, I am urging people that if they have not used their full annual allowance during the past three tax years, carry forward allows savers to ‘plug’ any gaps, provided they were a member of a registered pension scheme during the relevant period.

For example, someone who earned £50,000 in 2019/2020 and saved £1,200 a month into their Sipp could theoretically use their excess savings and invest up to £25,600 into their pension for the tax year ending April 2020. Such an investment would attract tax relief of £6,400. There are some conditions that must be met before such an investment can be expedited, but the carry-forward option is often overlooked by IFAs despite its obvious attractiveness.

During the first quarter of 2022, a variety of reliable surveys and reports have consistently shown that most excess savings continue to wallow in bank accounts earning peanuts.

As the new tax year dawns, therefore, this could be an ideal moment to examine possible gaps in Sipp contributions from earlier years and use a proportion of any excess savings to plug them and attract generous tax relief at the same time.

This article was written for International Adviser by Christine Hallett, chief executive of Options for Your Tomorrow.

As a result, the Insurance Authority (HKIA) has issued a circular to all life insurers which puts in place additional measures to open up the distribution of life products online.

The move follows growing demand for a variety of insurance products, while at the same time trying to minimise the risk of infection.

The temporary facilitative measures have been extended to 30 September 2022, where all life insurance products, including investment-linked assurance schemes, will be available via Virtual Onboarding Sandbox – a solution that allows the sale of life products via video conference calls – approved by the HKIA.

Insurers already operating via video services will not need to submit additional applications. Those that do not will be able to submit an application via a fast track process.

“The introduction of further facilitative measures aims to help address the need of potential policyholders in obtaining the necessary protection while minimising the risk of infection when taking out life insurance policies,” said Carol Hui, executive director of long-term business of the HKIA.

“We appreciate the unwavering support and dedication of our insurance industry in providing a professional service and timely protection for policyholders amid the current severe pandemic situation.”

The special administrative region is currently battling its worst covid outbreak since the pandemic started, and the Hong Kong Monetary Authority (HKMA) recently urged all banks to impose vaccination mandates.

The bank sent a memo on 2 March 2022 which said: “All HSBC employees, contractors and third parties will need to be vaccinated or have a valid medical exemption to enter any HSBC premises, including all branches,” a spokesperson confirmed to International Adviser.

It seems, however, that the mandate will not apply to customers, but those unable to provide a vaccine pass will hold meetings in designated areas.

The vaccination requirements will be applied on a phased basis:

• By 28 March 2022 all staff, contractors and third parties will need to have had at least one dose of vaccine;
• Two doses by 30 April 2022; and,
• Three doses by 30 June 2022.

While the rest of the world is learning, slowly and with some difficulty, to live with covid, in China, authorities are continuing to double-down in trying to stamp out the disease whenever it appears, and at any cost.

The problem for Metcalfe is that China has yet to experience large numbers of Omicron cases, so when the variant arrives, he argues that something will have to give.

“Reports that vaccines made by domestic firm Sinovac Biotech Ltd offer limited protection against Omicron will likely reinforce China’s resolve to stick with its covid zero approach,” he said.

“However, we think this is a significant economic risk and the results could be more severe than last time with the Delta variant.”

Serious global problem

With the delta variant, Metcalfe noted the Chinese authorities were able to keep things under control because the virus was not as transmissible compared to the hyper-transmissible omicron.

“So, while the onset of omicron may not result in many deaths, it could play havoc with the Chinese economy,” he warned.

Given that China is such a huge part of the global supply chain, Metcalfe said this is not just a worry for China and emerging markets, it is potentially a serious global problem.

“You either let omicron spread, or the supply chain collapses or at best comes under unprecedented pressure,” he added.

“As investors, if you think these supply chain problems will become an even bigger issue, the areas you want to be overweight in are assets such as commodities and value plays and underweight those areas which are expensive relative to history.”

Exposure

So what of Iboss’s China exposure? Whilst it would be easy to be negative on China for all the macro reasons, Metcalfe noted there was a huge difference in between Chinese equity and North America equity performance in 2021.

Indeed, by just being invested in the US and staying clear of China an investor would have gendered close to 50% of returns. So, Metcalfe said there are not just macro factors weighing on China, there is now a huge valuation difference to consider.

“At the same time, given last year’s regulatory crackdown which we saw, some of China’s smaller company’s also look quite attractive,” he added.

“So, it is not quite as black and white as us saying China is going to face lots of problems in 2022 because, while it will, it has already had a year of phenomenal problems. It all depends just how much these new problems will affect valuations.”

To reflect its cautiousness, Iboss has just added the JPM Global Macro Fund into the model portfolios.

“There is a real risk of investors becoming blind-sided about conversations regarding inflation, but things such as what is happening in China could pose a problem,” he said. “This fund is relative to equities and given the fundamental backdrop looks like it is changing, it is good hedge for the model portfolios.”