JPMorgan Chinese Investment Trust manager ‘7 out of 10' on bullishness scale
With China tussling for top spot in the Olympic medals table, more attention is currently focused on its sporting than its economic performance. But Howard Wang, co-manager of JPMorgan Chinese Investment Trust - by far the oldest such trust, with a record stretching back to 1993 - is cautiously optimistic on the prospects for investors, despite the country having suffered the much-feared economic hard landing.
On a scale of 1 to 10, where 1 is the most bearish and 10 the most bullish, Wang put his current positioning as a ‘7', backed up by the recent decision to modestly increase gearing on the trust, which is currently trading at a discount to net asset value of around 11% (at 30 July 2012). "While China's economy has hard-landed, the consequences have so far not been as bad as feared," says Wang. "For instance, although the property market has suffered a correction, this has in fact provoked more interest in owning property."
JPMorgan Chinese Investment Trust focuses principally on large-cap quality names listed on the Hong Kong, China and Taiwan stock exchanges, as well as companies listed on other exchanges that derive a substantial part of their revenues from these Greater Chinese markets. Examples include leading names such as China Mobile, Taiwan Semiconductor Manufacturing and AIA Insurance. Those listed in Hong Kong make up the largest part of the portfolio (Chinese ‘H' shares, Hong Kong Red Chips and P Chips and other Hong Kong-listed companies together make up 63% of the total holdings). The largest underweight position geographically is Taiwan, although at 22% this is still a significant part of the portfolio.
While the latest release of economic data in July showed China's GDP growth in the second quarter falling to a three-year low of 7.6% year-on-year, markets broadly took this news in their stride, although a sell-off in the Shanghai Composite Index late on in the month reversed any short-term gains. Hong Kong's Hang Seng Index, by contrast, rose slightly over the month.
Despite a bad Q2 GDP number, economic data in June in general suggests that growth has been stabilising. June's fixed asset investment (FAI) growth rebounded to 21.8% year-on-year in June from 21% in May. The pickup in investment growth is consistent with the well-above-consensus new renminbi lending, jumping to RMB 920 billion in June from RMB 793 billion in May. Broad money supply (M2) growth also rose to 13.6% year-on-year in June from 13.2% in May.
In view of the threat of job losses (there are no signs yet) due to both weak domestic and external demand as suggested by the latest PMI data, the Greater China investment team at J.P. Morgan Asset Management believe Beijing will take more decisive easing measures in the coming months to reverse the growth slowdown trend. In fact, the pickup in both investment and credit growth suggests that earlier easing measures are now starting to work, though they are unlikely to be sufficient. "Having said that, the risk of a hard landing for China is probably behind us," said the team in a recent note.
Although GDP growth often tends to be a key indicator of equity markets, China seems to offer a different story, reminding investors that there is often little correlation between strong economic growth and equity returns. For example, China's economy has outgrown the US economy by an average of 8% each year since the launch of the MSCI China equity market index in 1992. However, the equity market in China has lagged the US market by an average of 8% each year, indicating that GDP growth alone often seems somewhat irrelevant for an investor looking for returns in the equity market. The JPMAM Greater China investment team believe that investors should focus on areas that remain strong in value.
JPMorgan Chinese Investment Trust has produced a net asset value total return of 167.5% over 10 years to 30 June 2012, compared with a return on the MSCI Golden Dragon benchmark of 136.3%. Over three years NAV total return is 22.3% versus 23.9% from the benchmark, and in the 12 months to 30 June 2012 the trust returned -16.5% against a benchmark return of -12.2%.
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