The Year of the Rabbit: is it time to invest in China?

This weekend marks the Chinese New Year - but what will the Year of the Rabbit bring to investors looking to invest in China after a turbulent 2022?

It’s no secret China’s stock market has been struggling amid its strict zero-covid policy,  which has now been lifted.

Anyone holding funds and stocks in the region will have noticed a significant slump in their holdings after China’s economy was hit by closures of factories and consumer spending dropped.

But are fortunes for China about to change? After all, the rabbit is the symbol of longevity, peace, and prosperity in Chinese culture, so should we expect hope for this year?

“Its economy is reopening and re-engaging with the world, exports should begin to rise again and consumers will be able to get out and spend. There are still headwinds from the property sector, but the upside coming from the domestic rebound plus the return of manufacturing to fuller capacity should mean the economy stands in good stead,” James McManus, chief investment officer at Nutmeg, commented.

We look at what the prospects are for long-term investors looking to take advantage of Chinese equities.

Should you invest in China now?

For bargain hunters and long-term investors, China could be worth a look with experts saying the country is most likely set for growth. 

Rebecca Jiang, Co-Manager of JPMorgan China Growth & Income, added:  “We remain optimistic about the long-term prospects for the Chinese economy, which continues to be bolstered by the strong entrepreneurial ethos of China’s private businesses as well as the growing demand from the country’s burgeoning middle class.”

A number of experts say they expect the year of the rabbit to be one of recovery and an accelerated activity as the zero-covid policy is rolled back - and this indeed good be an excellent time to get into China.

Sophie Earnshaw, co-manager of Baillie Gifford China Growth, said: “As we enter 2023, China's macroeconomic, regulatory and pandemic policies are looking to be aligned with a pro-growth tone, for the first time in three years. Although economic data may remain volatile for the next quarter or two, China is likely to be one of the very few major economies where growth could accelerate in 2023, enjoying a reopening recovery like much of the rest of the world had in 2022. In the longer term, we continue to think the policy focus on quality of growth instead of quantity of growth will provide exciting stock-picking opportunities in areas such as green transition, hard technology, consumption upgrade and industrial automation.”

What will drive growth in China?

Lockdown has given consumers the opportunity to build up savings and according to fund managers, these domestic consumers will be the key driver of growth in China. In fact, it’s been reported that Chinese consumers have saved an equivalent amount to UK GDP during covid lockdowns.

Elizabeth Kwik, co-manager of abrdn China, said: “Once the reopening benefits fully materialise in the coming months, we expect to see a rundown of this excess saving. This should benefit a wide variety of sectors – from consumer to healthcare, property and finance. Given the largest theme of our portfolios is the growth of the Chinese consumer, this expected recovery in consumption bodes well for our holdings.”

What are the risks associated with China’s economy?

Although China is expected to see a post pandemic growth just as other countries have seen, Kwik argued that there are still some risks investors should keep in mind.

“The first is a potential effort to try and flatten the infection curve. As infection cases continue to mount, the strain on the healthcare sector is becoming more visible. While the government is working to broaden access to Covid treatment and is pushing to vaccinate more of the population, it is likely that the authorities may consider targeted restrictions in specific cities or parts of cities to rein in the infection and bring it under control. That could potentially dent near-term sentiment in the market.

“Beyond that, further escalation of US-China tensions, particularly over Taiwan, remains a lingering issue but we do not at this point expect any sudden surprises considering the tone adopted by both countries following last November’s meeting between Presidents Xi Jinping and Joe Biden.”

Other headwinds to the economy include China’s debt, there’s an overhang on China’s property crisis, unemployment and ageing population. 

Exposure to China: Funds and trusts to consider

If you’re looking to add exposure to China to your portfolio, these are some funds and trusts to look at according to interactive investor’s Dzmitry Lipski, head of fund research.

  • Fidelity China Special Situations Trust - provides broad, diversified exposure to Chinese equities, including 'H' shares listed in Hong Kong and mainland-listed 'A' shares. 
  • Fidelity Asia - this will give you exposure to a broader range of emerging markets or Asia
  • Guinness Asian Equity Income Fund - this will also give you exposure to a broader range of emerging markets or Asia
  • JP Morgan Emerging Markets Investment Trust - holds  just over a fifth of its portfolio in China. Tencent is the portfolio’s third biggest holding.
  • Scottish Mortgage Trust - it’s worth knowing its long-running theme has been its holdings in Chinese internet stocks, such as Tencent and Alibaba. According to interactive investor, it has a 10% allocation to China, which would be good news for the trust after its returns in Scottish Mortgage Trust have seen a 40% slump in recent months.

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