How to play China
China presents something of a conundrum for the contrarian investor - and probably for everyone else. Some of the factors that make for successful contrarian investing are present: investors are fleeing in droves, for example.
A recent Economist article reported that in August alone, $10 billion (£6.5 billion) was withdrawn from emerging market bond funds and $24 billion from emerging market equity funds. The largest outflows were from Brazil, China, Indonesia and Turkey.
Another contrarian indicator is that recent performance of China's stock market has been attractively poor both absolutely and relatively: in the quarter to the end of September 2015 the Shanghai Composite was down about 27 per cent compared to circa 9 per cent for the FTSE 100 and 7 per cent for the S&P 500.
The longer-term performance picture is slightly different: recent weakness came after a period of strong growth from late last year, such that over one year and three years the Shanghai Composite has still outperformed the UK and US stock markets.
Over five years, however, China, and particularly Hong Kong, are lagging western markets.
So for contrarians, fear and panic get a tick; in terms of performance, the picture is mixed. But what about underlying reality and valuation? Here lies the rub - or at least the Chinese veil.
Neil Woodford, the doyen of equity income investors, was recently quoted as saying: 'China and bank stocks are impenetrable.'
China is a bit of a mystery. The truth is, surely, that in such a large and diverse, still-developing country, capturing the economic reality is always likely to be difficult, so perhaps no one really knows what is going on in the short term.
Distrust of official statistics has been compounded by awareness of the incentives for local party big-wigs to cook the books and overstate economic performance.
The inept handling of the recent stock market sell-off by the authorities has increased the not unnatural western suspicion of the liberal credentials of the Communist Party leadership.
Perhaps as investors we can be certain of only two things: the Chinese economy expanded in the most extraordinary fashion from the early 2000s and now it is slowing down.
Aside from this economic impenetrability, one of the issues that complicates investing in China is the number of different options available in terms of exposure and the diverse interpretations of what is meant by 'China'.
When looking at an investment trust investing in China, we need to understand whether the index benchmark for the trust - which governs how the fund manager invests - meets what we are trying to achieve.
According to a Morningstar report from 2013 - in respect of exchange traded funds (ETFs) - there were over 50 country, sector and strategy indices tracked by approximately 100 Chinese equity ETFs, with an interestingly large combined $28 billion in assets under management.
The JPMorgan-managed trust has as its benchmark the MSCI Golden Dragon index: this captures the equity market performance of large and mid-cap China securities (H shares, B shares, Red-Chips and P-Chips).
That means they are mainly offshore-listed and non-domestic China securities listed in Hong Kong and Taiwan.
The performance of this index from year to year can diverge quite significantly from China A shares (onshore China shares listed on the Shanghai and Shenzhen stock exchanges), although the very long-term performance seems much the same.
The Fidelity trust has MSCI China (N) as its index; the main difference from the Golden Dragon index being that it excludes non-domestic China securities listed in Hong Kong and Taiwan. It is marginally a more 'pure' China play.
In reality the Fidelity trust seems to deviate quite a lot from its index and has a small company bias. Up to the end of August it had outperformed JPMorgan Chinese significantly over one, three and five years. Shares of both trusts are currently on 13 per cent discounts to their net asset values.
The potential of China remains enormous. Nonetheless, China will be a volatile place to invest for some time, as it negotiates the transition to a more consumer-driven society.
To hedge your bets, look at a generalist emerging market trust such as JPMorgan Emerging Markets, although that currently only has 13 per cent in China, with larger exposure to India and South Africa.
Emerging markets are certainly a pool for the contrarian to be at least contemplating fishing in at the moment; but as ever, they are for the long term and patience is required.
David Liddell is majority owner and chief executive of IpsoFacto investor, which is authorised and regulated by the Financial Conduct Authority. It is offering a free two-month trial of its investment advisory services: ipsofactoinvestor.co.uk.