Investment Strategies
The Year Of The Rooster: Investment Managers' Predictions

A group of investment managers predict what is on the cards for the Chinese New Year.
On 28 January begins the Chinese New Year, the year of the
Rooster. These creatures are seen as trustworthy with a strong
sense of timekeeping and responsibility at work, while they are
also outspoken and daring. As the world’s second-largest economy
begins its celebrations, here is a collection of views from fund
managers in the investment trusts sector. The opinions are
provided by the Association of Investment Companies.
Nicholas Yeo, head of equities, China and Hong Kong, and
manager on Aberdeen New Dawn and Aberdeen Asian Smaller Companies
investment trusts
External shocks to growth are most likely to come in the form of
trade tariffs if US president Donald Trump succumbs to his
anti-globalisation instincts. This would curtail Chinese exports
in the short term, and have a knock-on effect on bank lending and
manufacturing. In the long term, however, it would compel
policymakers to accelerate structural reform of outmoded
state-owned sectors.
We believe China has the resources and policy tools to guard
against financial instability. To preserve growth, we can expect
Beijing to step in and stimulate its economy, more likely through
infrastructure spending than a return to property stimulus. It’s
all part and parcel of China’s boom-bust transition from an
insulated and impoverished nation of farmers to a liberalised and
prosperous global powerhouse. For investors it translates into
stock market volatility.
China’s resolve to achieve economic self-dependence, combined
with its increasingly wealthy population, will drive demand for
consumer goods, in our view. This is where we are concentrating
our search for companies. Consumer areas, be they discretionary
or durables, are among the least controlled.
Dale Nicholls, portfolio manager, Fidelity China Special
Situations
When I speak to companies in China, Trump and the US is not a
major talking point, partly due to the lack of real clarity
around policy but also because the companies continue to focus on
the significant domestic market opportunities ahead of them. The
trust continues to be heavily weighted in companies set to
benefit from the growth and development of the domestic consumer
as opposed to overseas markets that could become tougher to
access. The bigger risk in China in my view remains the growth in
credit, and while we have seen signs of this slowing,
particularly in the so-called shadow banking area, more progress
needs to be made here.
As a stock picker, one of the biggest disappointments under the
current regime has been the lack of state-owned enterprise
reform. However, the year of the rooster could see some progress
here. We have seen some pockets of SOE reform, such as some
company management teams having their pay more aligned to
shareholder returns. Big wholesale SOE changes have so far eluded
us, but there have been signs this could change.
Overall, the portfolio continues to focus mostly on “new” China
and invests in areas of the market related to China’s
modernisation. In the year of the rooster I continue to see
significant opportunities and continue to concentrate investments
in companies related to consumption and the changing ways people
consume.
Roddy Snell, deputy manager, Pacific Horizon Investment
Trust
China’s growth rate is slowing, but this does not mean the
country is on the verge of economic collapse. Amid all the gloomy
headlines, it is easy to lose sight of the fact that China is
undergoing a planned economic transition from an investment to a
consumer and services led economy, which is imperative to
securing the long-term success of the country. Yes, there will be
casualties from the old economy, in particular the state-owned
enterprises that continue to destroy capital and the country’s
banks that fund their operations, but it would be foolish to
dismiss Chinese companies as an investment opportunity
outright.
For those with long-term investment horizons able to look beyond
the current environment of slower GDP growth, the new
consumer-led economy presents investors with a number of the most
interesting investment opportunities in the emerging markets
universe. There are three core drivers of this consumption story:
economic rebalancing; innovation and technology; and, China’s
world class technology companies. Combined, these are likely to
make China one of, if not the, world’s best consumption
stories.
Howard Wang, manager, JP Morgan Chinese Investment
Trust
Investors could potentially see a further tightening of financial
conditions in China in response to pressure on the currency, as
authorities attempt to buy time for an easing in the US dollar
rally. However, when combined with the continued tightening of
measures targeted at overheating in the residential property
market, China may find itself flirting with a growth slowdown
that could reverse the rally in industrial and commodity
equities.
However, as long-term bottom-up stock pickers primarily looking
for quality growth franchises, we believe “new China” businesses
should broadly outperform over longer time periods as interest in
industrial old China declines. With improving access to the
onshore China markets and what we believe to be the eventual
inclusion of A-shares in global indices, the A-share market will
increasingly offer the type of companies that reflect the dynamic
and growing domestic economies which make up the evolving
economic composition of new China.
We are currently invested in the consumer, healthcare,
technology/internet and environmental services sectors which we
believe will offer the most exciting investment opportunities
over the next couple of years. With a new interest rate regime on
the horizon, we believe beneficiaries of the reflationary
environment have grounds to gain as well.
Ian Hargreaves, manager of Invesco Asia Investment
Trust
While China’s economy is showing signs of stabilisation, this
improvement has been accompanied by continued high levels of
credit growth and an over-reliance on investment. Our view is
that China’s economy can probably manage high debt levels for
some years to come, as long as it is funded by domestic savings
and not dependent on foreign capital.
However, these trends need to be closely monitored as they are
not sustainable. In particular, we are watching trends in the
banks’ loan to deposit ratios as a key way to gauge the economy’s
vulnerability to a liquidity shock. In the meantime, we continue
to have significant exposure to China, although with a clear
preference for exposure to the “new economy” and favourable
structural growth trends in domestic consumption.