Shares in China-related investment trusts have fallen after a late 2022 rally amid fears the country’s economic recovery is uneven. While first quarter GDP jumped by a better than expected 4.5%, there are concerns the pace of growth may now slow.

Markets immediately priced in a stronger economic environment when the Chinese government indicated late last year it would relax Covid-related restrictions. For example, the SSE Composite index of Chinese shares has risen by 14% since the start of November 2022. That index has stayed firm year-to-date, yet names such as Fidelity China Special Situations (FCSS) and Baillie Gifford China Growth Trust (BGCG) have more recently been in a falling trend.

Abrdn China Investment Company (ACIC) is down nearly 20% since the start of February. Its portfolio is focused on various themes including rising affluence, growing adoption of technology and the green movement.

This trust switched focus in 2021 from emerging markets to investing directly in the equities of Chinese companies. Since then, it has been a hard slog after Chinese shares were hit by a clampdown on businesses by Chinese regulators.

Manager Elizabeth Kwik believes the recent China reopening story plays well to trust’s portfolio as consumers start spending again. ‘One of our key themes is domestic consumption. Upper-middle income households in China have a surplus of cash and the premium consuming class is rapidly expanding.’

But experts have warned China’s economic recovery could take longer than expected and may ultimately disappoint. Ron Temple, chief market strategist at Lazard is particularly cautious longer-term, saying: ‘The rebound from zero-Covid is likely to deliver 5.5% to 6% real GDP growth for China in 2023. However, the easy comparisons fade early in 2024, and I expect a significant downshift in Chinese growth thereafter as pent-up demand is sated and the lasting scars of the residential real estate reset and the zero-Covid policy fumbles reduce confidence in the household and corporate sectors.’

Kwik at Abrdn remains optimistic. ‘Valuations are still attractive and the recovery can continue post reopening. In contrast to the rest of the world there is lower inflation which will bolster economic and earnings growth,’ she says.

‘There was an initial rally when the reversal of the Covid strategy was announced, and in February there was a bit of profit taking, which is fair, and at that time we hadn’t seen any earnings yet or much visibility. But now, corporates have finished reporting their results for Q1, and companies are very positive on the ground for the rest of this year.’

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