JPMorgan China Growth & Income 28 December 2022

JPMorgan China Growth & Income (LON:JCGI) is focussed on delivering attractive total returns through investment in ‘Greater China’. The portfolio is managed by Howard Wang, Rebecca Jiang and Shumin Huang, who are supported by an extensive team of analysts based in the region. The portfolio is benchmarked against the MSCI China Index, however, the team have given the portfolio a strong tilt towards smaller and mid-sized companies which are aligned to the themes of the ‘new China’ (see Portfolio section).

China has progressed significantly in the past few decades and the team believe that as it closes the gap with the developed world, it will transition towards becoming a more consumption-orientated economy, while also taking on the challenges of reducing carbon emissions. The team believes that government support and stimuli will help drive this transition and they have positioned the portfolio to sectors likely to benefit from these themes, including healthcare, technology and consumer discretionary, as well as renewable energy and the electrification of transport.

The managers have delivered strong outperformance over the past five years, with JCGI beating both the benchmark index and AIC China sector, but the trading conditions in China since the start of the year have made markets challenging. Underweight positions in energy and financials have led to a performance shortfall year to date (see Performance section). JCGI pays an attractive dividend of 4% of the previous financial year-end’s NAV, which is mostly paid from capital. This, therefore, means that the dividend payout can fall, as well as rise, year on year. At the time of writing, JCGI’s discount is 7.8%, having averaged 7.7% over the last five years.

After a difficult period for Chinese stocks, Howard, Rebecca and Shumin note that their expected return framework for their portfolio over a five-year period is signalling the strongest upside potential it has had in at least a decade. However, they do warn that there are a series of unquantifiable risks connected to geopolitical tensions, regulatory interference and COVID policy which mean that investors need to be cautious and take a long-term view on any investment in China. The team have taken the gearing level to the upper range of JCGI’s mandate, reflecting their views on valuations and upside potential, so any recovery in the market should pay off well for investors and the current discount level could be an attractive long-term entry point.

We believe that China’s continued development towards a more modern economy, as well as the opportunities from the transition to carbon reduction, provides strong long-term investment opportunities, even if in the short term the market has been held back by the government’s miscalculated zero-covid strategy. However, following the recent nationwide demonstrations and unrest, the government has lifted the strictest lockdown measures which raises hope for a quicker path to normalisation. If so, we think the pent-up demand could result in strong recovery potential over the short term and the government’s continued support for key themes and sectors that JCGI is aligned with should support medium to longer-term growth potential.