01.02.2016

 

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 three 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 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.

 

GDP GROWTH (%)

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 companies 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 reach 340 million people this year, providing a surge in spending power.
  • 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.

 

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 Asian Infrastructure Investment Bank (AIIB), which is aimed at funding regional development.

 

 

SUSTAINABLE GROWTH

In the last year, Chinese economic growth has come under market scrutiny as some macroeconomic indicators have shown a slowdown in parts of the economy. This has prompted some concern among investors who fear the economy is heading for a “hard-landing” which would see stock values tumble and local and international firms’ performance hit.

 

However, Ian Lancaster, founder of Cogent Asset Management and portfolio manager for the WIOF China Performance Fund, is one of many who thinks such as scenario is unlikely and that the kind of growth rates being seen in China today are sustainable for years to come.

“I doubt very much that the Chinese economy will suffer from a hard landing,” he explains.  “The deflation of the property bubble has in fact been managed quite well with price declines being moderate. There has been no sign of the much talked about Chinese property crash. The American economy is growing strongly and Beijing has plenty of monetary and fiscal firepower to bring to bear. As such Chinese growth of around 6-7% will be sustainable.”

 

Indeed, Beijing has already implemented a number of measures to ensure the economy stays strong. During November the communist party unveiled the latest five-year plan for the economy with a strong emphasis on reforms to maintain growth near current levels and set a minimum economic growth benchmark of 6.5%. It also underlined that the market should be allowed to play a decisive role in allocating resources and that the country’s services sector would be opened. Meanwhile, a guideline for reforming the running of China’s state-owned assets, which are valued around USD 15.7 trillion and provide more than 30 million jobs, was announced, laying out plans to establish investment firms to manage the more than 150,000 state-owned enterprises in the country. These announced reforms followed other measures which had been already implemented earlier in 2015, including a slew of rate cuts, a reduction in the cash reserve requirement for banks, state spending on infrastructure projects, a 50% cut in the car purchase tax as well as a lowering of obligatory deposit payment rates on mortgages from 30% to 20%.

 

One other reassuring thing for investors is not just Beijing’s apparent commitment to ensuring its economy remains on track but the enormous financial and economic firepower at its disposal to do so. The authorities have room to cut interest rates even further and drop banks’ reserve requirement ratio even lower. Beijing can also ramp up its physical spending even more with the current fiscal budget deficit at just 2%. And just as importantly, the economy remains essentially in state hands, meaning massive stimulus can be agreed on and directed very quickly to where it needs to go.

 

“Beijing has plenty of monetary and fiscal firepower to bring to bear,” Lancaster says.

OUTLOOK

As the Chinese economy transitions away from being export-driven to consumption-led 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 demand. This is very beneficial in the long term. Meanwhile, although economic growth is slowing, its pace continues to far outstrip that of other major economies and Beijing has demonstrated that it is committed to ensuring the health of the economy, having announced key reforms to stimulate the economy.

 

While there is evidently some concern among investors over the health of the wider economy, the Fund is well-prepared for any developments. 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. The firm’s AUM stood at USD 41 million as of March 2015.

 

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.