Why fund houses are unfazed by China

With the Chinese stock market rout and Greek turmoil, these are testing times for Indian investors who have diversified their portfolio by investing in international funds.

Yet, fund houses are not very worried as they believe that there are still pockets of good investment opportunities in China and that the Greek crisis will not impact the Euro Zone greatly. The hardest hit international funds are the ones that are invested in commodities, which have taken a hard knock due to the slowing global demand.

Selectively positive China-focussed funds such as Mirae Asset India–China Consumption, Mirae China Advantage and JP Morgan Greater China Equity Off-shore, invest predominantly in the ‘H’ shares listed on the Hong Kong Stock Exchange. With the massive rally until the recent corrections happening only in the ‘A’ shares listed in mainland China, the returns of these funds have not been meteoric.

Yet, both the China Advantage Fund and the Greater China Equity Off-shore Fund have been among the top-performing international funds in the last one year, giving 10-11 per cent returns. With the Hong Kong dollar pegged to the US dollar, the returns have also been helped to an extent by the depreciation of the rupee against the greenback.

The greater worry for China focussed funds is the economic slowdown there. But fund houses such as Mirae Asset say that there are still pockets of promise in China. “With a per capita income of about $7,000 and rising demand for luxury goods, we are very bullish on the Chinese consumption theme,” says Gopal Aggarwal, CIO, Mirae Asset India.

“The pockets where there are concerns include cement, metals and mining and banking. In the first two, we expect incremental growth to slowdown from hereon, while the banking segment is faced with NPA issues. But we are playing China through natural gas and renewable energy companies that are doing well. We are also positive on insurance, healthcare and e-commerce,” he adds.

But a reiteration of the Chinese slowdown means bad news for investors in global commodities funds, with China being a giant consumer.

Funds such as Birla Sun Life Global Commodities Fund and DSPBR World Energy Fund, for instance, are already among the worst performing international funds in the last one year, falling by 18-24 per cent.

Not Greece, but euro As European markets recovered, 2014 saw new fund offers of at least three Europe-focused funds such as Franklin India Feeder -- European Growth Fund, JP Morgan Europe Dynamic Equity Offshore, and Religare Invesco Pan European Equity Fund.

Together, these funds have about ₹300 crore of assets under management. But one-year returns remain weak, being either negative or in low single digits.

“The pan-European fund has done well with returns of 14-15 per cent. But it has been wiped out because of the appreciation of the rupee against the euro.” says a spokesperson from Religare Invesco. But he is quick to add that the fund does not have exposure to Greece. The UK, France and Switzerland remain the top geographies.

Fund houses such as Franklin Templeton don’t see the Greece crisis impacting other Euro Zone countries. In a recent official blog, Norm Boersma, Cindy Sweeting and Heather Arnold of the Templeton Global Equity Group say: “Greece represents less than 2 per cent of Euro Zone GDP and Greek assets have largely been divested from Euro Zone bank balance sheets, further suggesting that any potential impairment to the wider region could remain limited.”

But for investors in these funds, while Europe may still hold promise with regard to economic growth, any continued weakening in the euro may have to be watched out for.

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