01.07.2015

Investing in Chinese equity markets, the WIOF China Performance Fund offers investors access to an economy set to soon become the world’s largest and whose growth continues to outstrip developed and emerging market peers.

WHY CHINA?

China’s economy has grown phenomenally since it was reformed and opened up more than two decades ago. Since then, the country has seen the creation of a modern, market-based economy whose growth has continuously outpaced the world’s major economies. While China is currently the world’s second largest economy, it is on track to become the world's largest within ten years as domestic consumer spending triples over the next decade, according to the economic analysis and research group IHS.

 

Urbanisation on a huge scale and the foundation of ever-expanding giant metropolises around the country is also fuelling growth across all sectors while its corporate sector has mushroomed in recent years. And while much has been made in the past year about the slowing of the Chinese economy, it is continuing to grow at a pace massively outstripping that of not just western economies, but many other emerging and developing economies.

 

As Ian Lancaster, portfolio manager for the WIOF China Performance Fund, explains: “Whilst China’s growth is slowing, it should be remembered that the 7% level that it is now stabilizing at is more than three times that of other major economies.“

 

SECTOR BREAKDOWN

One of the key drivers of the economy has been the rise and continuing expansion of a massive middle class consumer base. This is driving retail and other sectors as wealth is created and disposable income and consumption rises. This in turn is fostering the development of a sophisticated consumer economy with opportunities not just for domestic concerns but for global firms as well.

 

China’s middle class is expanding rapidly. Estimates for the pace of that growth vary, but the figures involved are enormous:

  • Global finance house HSBC has said it sees one hundred million people moving into China's middle-class in the next 10 years, creating major opportunities for increased trade and consumer spending.
  • According to China Business Review, the country’s middle class is forecast to triple to 340 million in 2016, providing a surge in spending power in China.
  • Predictions from the UN are that China’s middle class will be four times the size of America’s within the next two decades, with as many as 1.4 billion middle class consumers by 2030.

 

This growth will also help as Beijing looks to rebalance the economy to encourage domestic consumption and cut back on its traditional dependence on exports. Its ambitious plans to do so have been praised by economists and are already bearing fruit - for example, spending on services now exceeds spending on manufacturing and construction. Sectors such as healthcare, environmental remediation, IT and entertainment and leisure are among those expected to benefit most.

 

GDP GROWTH (%)

 

But Beijing is also acutely aware of the need to provide trade opportunities and already has a USD40 billion Silk Road Fund – investing in infrastructure, resources and industrial and financial cooperation across Asia - in the pipeline and has established the USD100 billion Asian Infrastructure Investment Bank (AIIB), aimed at funding regional development. While this could be economically daunting for some countries, the Chinese economy is underpinned by one thing most other economies do not have – the power and resources its authorities have.

 

As Ian Lancaster explains: “It is important to understand that the Chinese economy is very different from economies in the West. The authorities have immense power and huge financial resources at their disposal.”

OUTLOOK

As the Chinese economy transitions there has been a significant slowdown in construction activity and a reduction of demand for materials. However, the main drivers of Chinese demand are moving away from capital projects and urbanization, and towards growth through domestic consumer demand. This is very beneficial in the long term. The Chinese currency is less undervalued than it was, and the current account surplus is shrinking. Economic growth is slowing, but its pace continues to far outstrip that of other major economies. In addition, whilst the 2014 economic growth rate of 7.4% is a quarter-century low for China, 25 years ago the base for calculating growth was much lower. The overall performance of Chinese equity markets in recent times also suggest that investors are positive about the economic environment.

 

But no matter how the Chinese economy fares in the short and medium term, the Fund is well-prepared. Its holdings are selected using a systematic investment process which sees the portfolio manager focus on isolating the most appropriate investment styles for any given market, stylistically hedging the portfolio for any eventuality.

 

INVESTMENT ADVISER

The Fund’s investment adviser is Cogent Asset Management Ltd. The founder directors of Cogent Asset Management Ltd have previously managed award-winning and top performing funds across various categories. The team has developed a propitiatory strategy for managing equities through a process driven and systematic approach to investment which rigorously implements stock selection based on quantifiable fundamental criteria.

 

IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17 December 2010 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser/legal adviser/tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser/legal adviser/tax adviser, they should consider whether the WIOF is a suitable investment for them.