With their low valuations, China equities offer some of the strongest potential upside amongst the various markets we cover (we currently have a 5-star rating on the China equity market). Nevertheless, with 9 China equity funds currently on the platform, choosing a suitable one can be a difficult process. Our recommended fund, the DWS China Eqty Fund Cl A SGD, has demonstrated a good mix of resilience and strength in performance in the past, and would be a suitable starting point for investors looking for China equity exposure. For investors who are looking for something more, we highlight several features and distinctive points which can help to differentiate the various China equity funds
1. Benchmark Differences
Amongst the 9 China equity funds on the platform, 8 are benchmarked against the commonly-used MSCI China index (or some variant of the MSCI China) which covers the large and mid-cap segments of the China equity market with securities in China H shares, China B shares, Red Chips as well as P Chips. On the other hand, the Aberdeen China Opportunities is benchmarked against the MSCI Zhong Hua index, which in addition to the segments covered by the MSCI China index, also covers the MSCI Hong Kong index. Thus, the Aberdeen China Opportunities tends to have rather different holdings compared to its peers, and would be suitable for investors who want to participate in the growth of both Hong Kong (currently also a 5-star rated equity market) and China companies.
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2. Consumption Focus
Consumption is a key growth theme in the Asian context, particularly so for China which has the world’s largest “middle class” population, estimated at over 300 million (as much as the population of the US). China also recently signalled its intention to rebalance its economy towards a more consumption-driven composition, which would entail sacrificing some of its blistering pace of growth for longer-term sustainability. While the China consumption growth theme would likely benefit the overall China equity market over time, the Fidelity China Consumer A SGD may appeal to investors who want more targeted exposure and to tap on the long-term rise of Chinese consumption; as of end-March 2012, the fund had 42.5% of its holdings in consumer-related stocks.
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3. Currency Hedging
Amongst the 9 China equity funds on the platform, the Schroder ISF China Opp SGD H A Acc is unique in its currency hedging structure – the fund is hedged to the SGD which can add an additional component of returns for investors (note that the fund’s benchmark is the MSCI China TR Gross SGD-Hedged). The fund will be suitable for investors who have a strong view that the USD (and hence, the HKD, due to the peg between the two currencies) will likely depreciate against the SGD over the long-term. While the hedging strategy means the investor will fare better when the SGD appreciates against the USD, the converse is also true – a depreciation of the SGD against the USD will result in inferior returns compared to the un-hedged strategy (Schroder China Opps Fund SGD).
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