JPMorgan China Growth & Income 18 September 2024

JPMorgan China Growth & Income (JCGI) is focussed on delivering attractive total returns through investment in Greater China, i.e. China, Hong Kong, and Taiwan. The current managers, Rebecca Jiang and Li Tan, are growth-orientated investors at heart, scouring the investable universe for high-quality businesses that can deliver higher, yet more sustainable earnings growth compared to the market (see Portfolio). As such, they seek high-conviction opportunities, in particular, secular growth areas, including technology and healthcare, which, given recent market volatility, means they’ve taken advantage of attractive valuations and added to a number of new businesses on share price weakness, including BOE Technology, a global leader in the manufacturing of electronic panels.

The last five years have been a boom-and-bust story for Chinese equities. Significant dents to sentiment following tensions with the US, a burst bubble in residential housing, and lacklustre economic recovery following the lifting of its zero COVID policies have hit China’s economy hard. This is a harsh market environment for JCGI’s strategy, which has led to it underperforming over the last three years, although, its long-term record remains impressive (see Performance). Despite pressures, though, the managers point to valuations sitting at historic lows. They’ve been able to top up or add to businesses with great long-term prospects, positioning the portfolio well for when sentiment towards China improves.

JCGI also pays an attractive Dividend of 4% of the previous financial year-end’s NAV. This, therefore, means that the dividend payout can fall, as well as rise, year on year. At the time of writing, JCGI’s Discount, currently 12.9%, exceeds its five-year average of 6.6%.

JCGI has been awarded a Kepler Income & Growth rating for 2024.

Overall, we think JCGI is an attractive way to invest in China for those wanting to maximise their chances of gaining long-term growth. The managers remain focussed on high-conviction growth opportunities with excellent long-term prospects, leveraging the extensive resources of the EMAP team to capitalise fully on these opportunities. Having an established on-the-ground team allows for deeper market coverage and reduces the likelihood of being sidetracked by short-term market noise, in our opinion. However, the past three years have proven to be a very difficult period for investors in China, JCGI being no exception.

Various geopolitical and economic factors, including Russia’s invasion of Ukraine, prompted a re-evaluation of China-related relationships, dampening sentiment and contributing to JCGI's underperformance against the index. Additionally, sharp shifts in the global interest rate landscape favoured cyclically sensitive stocks, which JCGI has limited exposure to (see Performance). Despite these challenges, the managers remain optimistic about the portfolio’s growth potential, citing stabilising consumption trends and improved adaptability among companies, coupled with 20-year low valuations, which is broadening their opportunity pool.

For investors with an iron stomach and a long investment horizon, we think the value within the Chinese market looks potentially attractive. Chinese equities have the potential to rally quickly if economic tensions ease and sentiment improves, and given JCGI’s greater growth profile than the market, it could subsequently lead to an uptick in performance and a narrowing of the Discount. However, investors should consider that a weak appetite for Chinese equities could weigh on the NAV and the discount in the near term.