29.06.2016

 

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 recently 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.

 

Estimates for the size of the middle class vary from between 100 million and 500 million people, depending on the income bands used to define middle class. But by any calculations the country’s middle class is enormous and is set to keep growing.

 

  • Data released late last year by Credit Suisse showed that the country’s middle class was now larger than that of the US, reaching a total of 109 million.
  • The number of upper middle-class households – those with an annual disposable income of between roughly USD24,000 and USD46,000 - in China is forecast to double to 100 million by 2020, according to research from the Boston Consulting Group, accounting for 30% of all urban households. This is up from 17% in 2015 and just 7% at the start of the decade.
  • 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.

 

And this middle class growth is driving the economy as domestic consumers’ incomes continue to rise:

 

  • Official data has shown that retail sales in China grew more than 11% last year – this was despite an economic slowdown. Meanwhile, urban household incomes rose by over 8%.
  • A booming service sector also helped create 13 million jobs in 2015 while consumption was responsible for almost 60% of economic growth in the year.

 

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.

 

 

SECTOR BREAKDOWN

 

 

SUSTAINABLE GROWTH

In the last 18 months, Chinese economic growth has come under market scrutiny as some macroeconomic indicators have shown it slowing. But while that is the case, the country’s 6.9% GDP expansion last year was still way above that of most countries and far outstrips the world’s largest developed economies. And experts point out that while there may be no more double-digit growth rates in China, this is not a sign of economic weakness. They argue that lower growth rates in China are likely to become the new norm, but that this is nothing bad and is to be expected as the Chinese economy transitions to a new, more sustainable domestic consumption-led model.

 

Ian Lancaster, founder of Cogent Asset Management and portfolio manager for the WIOF China Performance Fund, says a growth rate of around 7% is “sustainable”.  “A sustainable growth rate of 6-7% would be the envy of developed nations!” he points out.

 

Indeed, Beijing has already implemented a number of measures to ensure the economy stays strong, including recently setting a minimum economic growth benchmark of 6.5%, plans to reform the running of China’s state-owned assets, while throughout last year authorities cut rates, reduced the cash reserve requirement for banks and upped state spending on infrastructure projects, among others.

 

Beijing is also committed to ensuring a good environment for investors and is clear on the significance of the stock market in maintaining a healthy economy. Reports on a recent Politburo meeting showed that the government has pledged to create a healthy stock market and beef up regulation to protect investors. The rare mention of the stock market at a Politburo meeting was seen as a sign of its significance to the overall economy with local economists pointing out that a properly-functioning stock market was an integral part of sustainable financing channels for companies. It has been reported by local media  that the government is aware of the urgent need to overhaul financial oversight in the wake of the kind of turmoil seen on local stock markets in 2015.

 

One other reassuring thing for investors is not just Beijing’s apparent commitment to ensuring its economy remains on track but the firepower at its disposal to make sure it does deliver. 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. “China is not a normal economy. It is managed by the state which could quite frankly put the stock market at whatever level it wishes,” he adds.

OUTLOOK

Economic data out of China in recent months has been mixed and there is no doubt that the economy is slowing and does face some structural headwinds. But Beijing has said it remains committed to its efforts to support growth and has recently overhauled taxes and implemented fiscal stimulus measures to keep it on track. Its apparent commitment to ensuring a good investment environment – committing to the importance of a healthy stock market it sees as an integral part of the economy - is also encouraging for investors.

 

But 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.

 

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.