How to buy into China’s recent rally

After a rocky 18 months, investor interest in China is picking up. Last month saw the biggest rise for China’s market since December 2012, while economic growth is also improving. The government has boosted infrastructure spending and cut taxes. And it looks like the rally will continue.

Mark Mobius, long-serving manager of the Templeton Emerging Market Trust (LSE: TEM), was reported on SeekingAlpha as saying the rally “is sustainable because of the amount of money available for the market. Banks are sitting on a lot of fuel to add to the fire”.

Make no mistake, the outlook for China isn’t uniformly rosy. Debt levels are high and property prices look very vulnerable in some areas. But it’s also worth noting that future problems are probably already reflected in share prices.

Put simply, on a forward price/earnings ratio of nine, China’s market looks cheap. What’s more, share prices may well get a boost later this year when it becomes easier for overseas investors to buy ‘A’ shares on the Shanghai stock market. Currently, these are largely reserved for Chinese investors.

So how can you invest in China yourself? We’re normally big fans of exchange-traded funds (ETFs). ETFs replicate a particular index and normally have low charges. If you want a China ETF, take a look at the iShares FTSE/Xinhua China 25 ETF (LSE: FXC), which tracks 25 of the largest Chinese stocks and is a cheap way to play the story – the total expense ratio (TER) is 0.74% a year.

However, although the charges will be higher, there’s a case to be made for picking an actively managed fund if you want to invest in a relatively immature market such as China. In other words, there’s scope for a good manager to beat the index.

My favourite active Chinese fund is the JP Morgan Chinese investment trust (LSE: JMC), in which I’ve invested myself. It’s been running since 1993 and the share price has risen by 55% over the last five years, which isn’t bad.

What’s more, the trust is on an 11% discount, so you’re effectively getting assets worth £1 for 89p. An 11% discount is also on the high side these days, as discounts have narrowed a lot in recent years. The TER is fairly low at 1.24%.

If you prefer unlisted funds, GAM Star China Equity has been the top-performing China fund over the last three years. “Despite the low fee [1.5%], this is anything but an index-tracking option,” says Morningstar. Manager Michael Lai isn’t afraid to make big bets and has done well investing in information technology, Macau gaming and health-care stocks.

Merryn

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