China: An evolving story

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Jade Fu, Investment Manager at Heartwood Investment Management comments on the Chinese economy’s performance.

It is no secret that economic growth in China has slowed over the last few years, and for most investors it is accepted that the world’s second largest economy is facing a secular slowdown – the age of super-charged double digit annual growth is now well and truly behind us. This slowdown was inevitable, a result of changing demographics and the natural maturing of an economy. The Chinese government has realised the necessity for pre-emptive action to smooth this transition and has set out its plan, shifting focus away from investment and exports.

Despite this, it has taken financial markets several years to come to terms with the “new” China. After all, rebalancing a huge economy which has been growing at a “supersonic” rate and which has accumulated many structural imbalances is no easy task. Indeed, since the end of 2009, the Chinese equity market has substantially underperformed global equity indices.

At Heartwood, while we were early to recognise China’s structural issues – an investment driven growth model, local government’s reliance on land sales, debt overhang of state owned companies – we do believe that China will ultimately manage to achieve a successful transition. As such, there is still good money to be made, especially given how little appetite there is among international investors currently and how cheap valuations are. With this in mind, we have had an exposure to Greater China (which includes Hong Kong and Taiwan) since the end of 2011. That said, we are well aware that China’s multi-year economic rebalancing was never going to be a smooth journey and have therefore taken special care when managing our specific sector exposure.

Our exposure has been explicitly off benchmark throughout recent months. We have been underweight Banks, Energy and Materials (all of which make up more than 50% of the MSCI China Index), favouring instead those sectors that we feel will thrive in “new” China, such as Consumer Discretionary and Information Technology.


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