One of the first investment trust to focus purely on the greater China region, we believe the JPMorgan China Growth and Income is poised to benefit from the reopening of China following the Covid-19 pandemic, and the growth potential of China as an economic powerhouse.
China hit the headlines back in November 2022 when it finally relaxed the onerous restrictions that had been imposed during the Covid-19 pandemic, and the economy rebounded dramatically.
Given the growing middle class, rising incomes and technological innovation underpinning the growth potential of this economic powerhouse, which is set to become the largest economy in the world within the next decade, it was easy to understand the excitement.
But more recently, progress has been relatively muted – to the disappointment of the markets. Although the Chinese market is up 30% since the economy reopened1, all of that recovery occurred in the initial month or so, and stocks are fairly flat across 2023.
China’s sound macroeconomic backdrop
However, Rebecca Jiang, manager of the JPMorgan China Growth & Income investment trust (JCGI) is sanguine about the state of the macroeconomic backdrop, for a couple of reasons.
She argues, first, that China’s GDP growth, while it falls short of market expectations, is very much in line with the 5% government target, and indeed, market consensus is for 5.4% this year2.
Moreover, consumer spending is looking healthy, particularly given the large surplus savings households have built up over the past three years. “So far most consumption has understandably been channelled towards in-person services such as tourism and travel, dining out and hotels, which saw the biggest cutbacks during the pandemic,” she notes. “Healthcare has also seen a strong recovery in demand.”
These are areas where JCGI’s portfolio has considerable exposure, through stocks such as mid-level hotel chain H World. The stock has seen a strong Q1 recovery with room rates above pre-Covid levels and a high occupancy ratio, Jiang says. But it’s important to understand the macro headwinds that have worked against the rebound this year. Although consumption has picked up and households have cash to spare, they are still worried about future income growth and job security. Consumer confidence needs time to recover,” emphasises Jiang.
Additionally, capital investment has been relatively weak. The property market has endured a prolonged downcycle, and residential sales remain sluggish.
China’s export strength is also under fire, as developed markets see the continuing threat of recession on the horizon. But Jiang makes the point that the government is working to support overall growth and build business confidence, through diverse measures such as relaxations in home purchase restrictions in some cities, flexible credit policies and initiatives to stimulate demand for electric vehicles.
What does this all mean for JCGI’s portfolio? Jiang points to three areas where the team is finding particularly interesting opportunities.
One is green technology, from renewables to electric vehicles, where China is a global leader on the technological fronts but is also seeing growth in domestic demand. JCGI holds Suzhou Maxwell, for instance, is a leader in solar cell manufacturing equipment.
Another is the broader hardware arena, as the country moves towards greater self-sufficiency – through businesses such as semiconductor manufacturer Montage – and wider digitisation.
Thirdly, says Jiang, China’s technological giants Alibaba, Tencents and their peers are seeing “significant improvements in core profitability” after two difficult years.
“We are seeing structural changes in their mindsets and strategies as the companies mature, away from ‘growth at any price’ and towards profitable growth,” she explains. “We believe that’s a better long-term outcome for minority shareholders.”
China remains one of the best markets in which to find growth opportunities
Overall, as locally based, bottom-up, high-conviction stock pickers, the JCGI team are seeing plenty to interest them in a relatively cheap Chinese market at the moment - so much so, in fact, that gearing currently sits at 18%3, just below the maximum 20%, to enable them to take advantage of attractive opportunities as they arise.
JCGI's position has been enhanced in recent months with the acquisition of the China-based research and investment business China International Fund Management, which has been rebranded as JPMorgan Asset Management China.
“It means our research capability in onshore China is greatly strengthened, with an extra 20 research analysts and 14 professional investors there; they have a particular focus on many of the growth areas in which the trust is invested,” Jiang says.
Nonetheless, times have not been easy recently for Jiang and her team. Although the trust has strong long-term performance, there have been macroeconomic challenges. Notably, the combination of a rotation from growth to value outperformance and the recent underperformance of Chinese privately owned businesses against state owned enterprises has left it trailing the benchmark index year to date and over the past 18 months or so.
Despite the headwinds, JCGI’s focus has not changed. “We still think the best opportunities for long-term growth lie in the private sector: that’s where we see most competitors, most entrepreneurship, and most rational capital allocation and corporate governance,” Jiang observes.
Performance has been further held back at a stock level: for example, the internet-based businesses to which JCGI has exposure have struggled as broader demand has returned. “But we continue to stay in these names as we believe in their long-term competitiveness of the core business,” she adds.
Overall, Jiang believes that China is entering a period of structurally slower growth, reflecting changing demographics and productivity. Over the longer term, annual GDP growth is likely to be more like 3-4% rather than 5% plus4.
However, she stresses, there are still opportunities. Increasing digitisation and automation are driving the technology sector; energy transformation is an area where China leads globally; the country’s ageing population will continue to underpin demand for healthcare; and she also sees growth in consumer discretionary in-person services as consumers gain confidence and spend their savings.
“China remains one of the best markets in which to find growth opportunities,” she says. JCGI’s newly expanded and highly experienced local research team will be a powerful tool in unearthing them in the months and years ahead.
1 J.P. Morgan Asset Management, as at June 2023.
2 J.P. Morgan Asset Management June 2023/ National statistics bureau, Haitong Securities. Data as of 31 January 2023. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.
3 J.P. Morgan Asset Management, as at June 2023.
4 J.P. Morgan Asset Management, as at June 2023
The companies above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
Source: J. P. Morgan Asset Management Performance data has been calculated on a NAV Offer net of fees basis in GBP. NAV is the cum income with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Excess returns is calculated geometrically. Performance less than one year is not annualized. Inception: July 2010. Past performance is not a reliable indicator of current and future results.
More Insights
Summary Risk Indicator
The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.
Investment objective: The Company aims to provide total return from investment in ’Greater China’ companies which are quoted on the stock exchanges of Hong Kong, China and Taiwan including A shares listed in Shenzhen and Shanghai or which derive a substantial part of their revenues or profits from these territories. The Company makes quarterly distributions, which are announced to shareholders for the next four quarters at the beginning of each financial year. On aggregate, the intention is to pay dividends totaling at least 4% of the Company NAV on the last business day of the preceding financial year. The Company has the ability to use borrowing to gear the portfolio within the range of 10% net cash to 20% geared in normal market conditions.
Risk Profile:
- Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
- Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short-term price fluctuations.
- This Company may use derivatives for investment purposes or for efficient portfolio management.
- External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
- This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
- This Company may also invest in smaller companies which may increase its risk profile.
- The share price may trade at a discount to the Net Asset Value of the Company.
- The single market in which the Company primarily invests, in this case China, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.
- The Company may invest in China A-Shares through the Shanghai-Hong Kong Stock Connect program which is subject to regulatory change, quota limitations and also operational constraints which may result in increased counterparty risk.
This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
09z0230308140701