Terms & Conditions. Hide

Professional Advisers

Liontrust Blog

Mark Williams: What prospects for China in the Year of the Rooster?

Posted in [Fund Managers' Blog] By Mark Williams

The Liontrust Asia Income Fund had slightly over 40% exposure to Hong Kong and China at the start of the year. All of this is via companies listed in Hong Kong (not A-shares, listed in the Chinese mainland markets), but they are companies with exposure to the mainland Chinese market, rather than the Hong Kong economy, which we think will struggle in a world of rising United State interest rates.

This is the largest geographical weighting within the portfolio, reflecting a generally positive view on certain specific areas of the Chinese economy, but also marks a reduction from approximately 45% at its peak. The reduction comes after a period of strong performance in 2016.

Much of the equity strength has reflected a confluence of positive factors in the Chinese economy. Rate cuts in 2015 took interest rates to accommodative levels which were maintained throughout 2016, which helped those with high debt burdens and benefitted areas such as property. Government spending also continued, much of it in long-term infrastructure projects, which combined with recent cuts in capacity to improve material prices. This was further aided by the United States’ promise that whichever party won last year’s election would increase American infrastructure spending.

We think that Trump’s infrastructure promises will not deliver too much immediate commodity demand, however, and we also see the Chinese stimulus reducing as property tightening measures are already being implemented. This does not make us negative, but it does reduce the short-term positives.

Beyond this there are two elements that have pushed us to lower exposure: ongoing high levels of bank lending – still rising at almost double GDP growth – and the renewed sharp reductions of foreign exchange reserves (averaging approximately US$50bn per month for the last quarter of 2016).

We do not see either of these as a prelude to disaster, but as we have argued for some time the failure to cut lending and ongoing large reduction in reserves does increase risks for the economy.

The fund’s current positioning reflects this rising risk. Our exposure remains very selective, and does not cover the broader Chinese equity market, but we can still find plenty of companies where we think valuations look attractive, and which provide the combination of dividend yield and earnings growth that we are seeking. These tend to be in areas of domestic consumption or those with government support, which are areas we have liked for some years now.

Previous Entry: Liontrust fund managers’ “Reasons to be Cheerful”
Next Entry: Jamie Clark: Taking the edge off our pharma exposure


    Any opinions expressed should not be construed as advice for investment in any [product or] security mentioned or which may form the underlying content of any topics discussed in this blog.  The information and opinions provided in this blog take no account of the investors’ individual circumstances and should not be taken as specific advice on the merits of any investment decision.   Any opinions or information provided has been based on sources we believe to be reliable at the time of this blog’s preparation: no representation or warranty, express or implied, is made as to the accuracy, reliability or completeness of such information.  Neither Liontrust, nor any of its partners, employees, representatives or agents accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of our research or its contents.

    Liontrust, its partners and/or employees may have had, have or will have positions in the securities (or related financial instruments) which are those referred to, or those underlying the content discussed in this blog.

    Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested.  Always research your own investments and consult with a regulated investment advisor or licensed stock broker before investing.

    Shares in companies referred to may be relatively illiquid and hard to trade, therefore riskier than other investments and there could be a large bid/offer spread, so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments.