He says: “So many other countries in the region have exciting investment opportunities where we’re comfortable with the political system. We also like the businesses themselves, some of whom sell their goods and services into China, so we do not feel the need to invest directly in mainland Chinese companies.”
Pidcock says, with hindsight, he wishes he could have invested even less in the past decade. “(Chinese equities) been serial underperformers and they’ve performed badly compared to the higher GDP growth rate of China, which is better than many other countries,” he says.
“So it just goes to show you shouldn’t invest in GDP numbers – they often don’t translate. We’ve seen much better returns in many of the other markets in the region.”
For foreign investors, there is also the added issue of diversification. Many will have significant technology exposure through the US and may not want to double up with further exposure to tech stocks in China. The likes of Tencent and Alibaba account for more than 20 per cent of the MSCI China.
Why being fully active in China is the only sensible way forward
FSSA Global Emerging Markets Focus co-manager Naren Gorthy says his portfolio currently has around a 30 per cent allocation to China — this is based purely on the attraction of individual companies, available at low valuations, based on the impact of wider macroeconomic sentiment.
He points to businesses that have little to do with the troubled property or banking sectors as examples of good investments for the long term. These include the likes of Yum China (a fast food company) and China Resources Beer — both of which have reported strong results recently, he says.
JPM Emerging Markets trust investment specialist Emily Whiting says the recent challenges highlight the need to invest in active managers, rather than just back the China story. She says that while the heightened political sensitivity is having a material impact on industries and sectors, there remain a number of companies that are growing their margins and market share.
“Ultimately, it comes down to whether we as investors feel comfortable paying a certain price for a company and if we believe its thesis remains intact,” Whiting says.
“By contrast, other countries are benefiting. Take India as an example, it may look far more compelling, but you are having to pay a lot more for companies as a result. There is no doubt that what has happened to China has made it slightly less attractive versus other markets that do not have those external pressures.”
