The MSCI China index has done little better than the FTSE, while other emerging markets are now performing better than China.
With Evergrande narrowly dodging default again this week, the potential for turmoil in the Chinese stock market is still front and centre of investors’ minds. Chinese shares have already tanked this year as Beijing’s escalating regulatory clampdown has hobbled the country’s tech and consumer giants.
But what has perhaps flown under the radar is that this is more than just a blip for those betting on growth in the world’s second-largest economy.
In fact, over the last 10 years, performance in the Chinese market has been just ‘as bad’ as the UK – despite a period when Brexit and a glut of old economy giants have seen the FTSE at times approach the status of a pariah.
In the decade to the end of October, the FTSE All-Share delivered a 106.9% total return, with dividends reinvested. Meanwhile, the MSCI China index – the broadest gauge of Chinese companies irrespective of where they’re listed – managed 147.5% (all returns referenced are in sterling terms).
While that means the Chinese market did somewhat better than the UK, both paled in comparison to worldwide markets, which nearly quadrupled the money of those investing in a global tracker. On the back of exceptional gains on Wall Street, the MSCI World index rose 293.1% over the same timeframe.
‘It may surprise people that China has been as bad or almost as bad as the UK over the last 10 years when it comes to returns. Having led global markets in 2020, the country now lags the Emerging Markets excluding China index since the start of 2020,’ said Frank Talbot, head of investment research at Citywire.
‘This is particularly surprising given the drawdowns you had in other emerging markets, 50% in some, versus China where there was virtually none due to its ability to contain the outbreak quickly, relative to almost every other country in the world. That it now lags speaks to how well countries such as India, South Korea and Taiwan have been doing since the market bottom.’
That trend is borne out by the chart below, with the iShares MSCI Emerging Markets ex. China exchange-traded fund being used as a proxy to show how other developing equities have more than caught up.
Despite the poor overall returns from benchmarks, however, investors who decided to try their hand in the volatile Chinese market via an active fund, as opposed to a passive index-tracker, have probably done better.
The average return of funds in the Investment Association (IA) China/Greater China sector was 177.7% in the 10 years to the end of last month, beating the main index.
Though more narrowly, that also beat 170% for the MSCI China A index, which tracks the performance of companies listed in main China. Given the big tech companies tend to be listed in the US or Hong Kong – the biggest single stock in the A-Shares index is brewer Kweichow Moutai – this index has been more insulated from the tech crackdown.
‘China is still a stock picker’s market and active funds have done better than these surprisingly poor numbers over this time,’ said Talbot.
Actually, this is something China has in common with the UK. Fund managers in the IA UK All Companies delivered an average 124% return over the same period, beating the London-listed market.
Talbot added: ‘The wider theme here is that China has been out of fashion for much of the past decade, save for Chinese tech companies that, even with the pull-back due to regulatory fears, have been one of the success stories in global markets over that period.’
The active China winners
In that vein, many active funds have done not just better but much better than the index – especially those at the vanguard of China’s tech explosion.
Looking at open-ended funds in the sector with a 10-year record, the two top performers both focus on the local market. Barings China A Share delivered 304% while Allianz China A-Shares Equity returned a spectacular 482%, according to Morningstar data.
Out of mandates tackling the gamut of Chinese stocks, including foreign-listed Alibaba and Tencent, Baillie Gifford China gained 290% while JPM Greater China returned 286%.
At the bottom of the list, a couple of funds run by well-known UK asset managers have been woeful, with Jupiter China managing just 67% and Liontrust China eking out 86%.
In the small single country investment trust sector, both established names have strong records. Shareholders in Fidelity China Special Situations (FCSS) enjoyed a 359% total return over 10 years while JPMorgan China Growth & Income (JCGI) delivered 365% and has the edge in shorter timeframes.
New kid on the block Baillie Gifford China Growth (BGCG) has had a difficult first year since switching to its current mandate, although an 11.5% loss over 12 months is in line with rivals. Chinese stocks, including private companies, have also been a key driver of returns at Baillie Gifford’s swashbuckling global trust Scottish Mortgage (SMT), up a jaw-dropping 1166% in a decade. Despite this year’s ructions, exposure to Chinese companies still stood 17% at the end of September, according to its interim results.
The dominance of retail investors in the Chinese market is one factor that has historically played into the hands of active managers, who tend to have access to better information and be less short-term. That dynamic is starting to change, however.
Individual investors owned 95% of free-float shares in 2003, but this fell to 70% in 2010 and stands at just over 50% today, according to Fidelity China Special Situations’ latest annual results.
Rob Brewis, fund manager at Edinburgh-based Aubrey Capital Management, pointed out there were other factors that continue to make China attractive for bottom-up stock pickers. He said despite the private sector being ‘under the government cosh’, state-owned enterprises continue to generate low returns, while avoiding the ‘highly leveraged and largely bust’ property sector also looks a no-brainer.
However, Brewis and his colleagues on Aubrey Global Emerging Markets Opportunities fund, for which he is AA-rated for performance, still find plenty of companies with attractive growth potential.
‘To lump all of China together is often to miss the huge opportunities available within. We cannot tell you what the MSCI China or indeed any other index will do from here, and frankly, we don’t really care,’ he said.
‘But there are so many Chinese stocks that excite us, and we have little doubt that they will prove rewarding investments over the next year or two. And many of these are much more attractively valued than they have been for a while.’