The Schroder Greater China Fund invests primarily into the underlying Schroder ISF Greater China, which aims to provide capital growth mainly through investment in equity securities of companies in China, Hong Kong and Taiwan (clicke here to view the factsheet). In 2003, the fund returned 50% against a benchmark performance of 41% (offer-to-bid, in SGD, with dividends re-invested). Much of that performance came from the China equity market, which was one of the top performing Asian markets in 2003. In fact, pure China funds returned as much as 100% last year, buoyed by strong economic growth and very bullish investor sentiment. The market capitalisation of the China market hit US$630 billion in May 2003, making it the second largest stock market in Asia.

The fund manager of the Schroder Greater China Fund Louisa Lo says that the run-up in the China market has made her somewhat cautious on Chinese equities in 2004. She notes that valuations for that market currently look stretched. "I think valuations at the moment which is around 14-15 times PE ratio, is not excessive when compared to regional markets. However, compared to the historical average, it has been on the higher side. So there has been a lot of expectation that has been priced into the market, especially the small cyclical stocks."

As a result, Lo says the fund has been taking profit from the China holdings in its portfolio, particularly the higher beta and cyclical stocks. Simultaneously, the fund has been adding to its Hong Kong and Taiwan holdings. She explains that the fund is presently neutral in China, overweight Hong Kong and underweight Taiwan, although the holdings in Taiwan have increased of late. She says that Hong Kong and Taiwan equity markets now appear more attractive than China. "Last year, China has a sharp and spectacular run. It happened very fast, and a lot of stocks have been trading at the high end of the valuation range. So from that angle, we have top-sliced some of those China positions and ploughed money back into Hong Kong and Taiwan. For Hong Kong and Taiwan we are seeing a very steady recovery for the domestic economy since SARS outbreak. We have seen a reflationary impact on both markets. So we have been adding to these two markets."

HOLDINGS IN HONG KONG AND TAIWAN

In Hong Kong Lo says that the fund has been loading up on bank, media and some property investors stocks. She thinks that these sectors will benefit from the recovery in consumer demand that is now underway in Hong Kong. "Starting from mid last year, we did see start to see a domestic recovery in Hong Kong. Retail consumption has been going up, and the economy was benefiting from massive tourist arrivals from China. The macro environment is also positive for banks; there has been a reduction in bankruptcies. You really feel the difference in confidence between last year and this year."

She adds that though there are selected real estate names in the fund, such as Hung Lung Group, she is not extremely bullish on Hong Kong property stocks as a whole, as prices have risen substantially since the SARS period. "You do see a pick up in property. Prices are up more than 30% from the bottom. Prices have moved rather aggressively. Going forward we are still cautious. We are underweight versus the benchmark on property developers, especially the smaller ones."

In Taiwan, the fund manager says that she is especially keen on financials, although chip giant Taiwan Semiconductor is still the largest Taiwanese holding in the fund (see Top 10 Holdings). Lo says that she had previously been bearish on financials, but the recovery in the domestic economy and consolidation within the industry has made her rethink that view. "I have been bearish on financials for some time. But one of the reasons that I have been adding is that because we have seen some consolidation in the industry. The banks have been very aggressive in writing down the non performing loans. And when the economy recovers, financials are a domestic play. We anticipate a pick up in loan growth," she says.

LONG TERM STORY FOR CHINA STILL INTACT

Lo is quick to point out that despite concerns of overheating in the China equity market, she is still bullish on the long term prospects for China. Economic growth is still on track and exports are still strong, although they did slow down in the January 2004 period. The drop had raised concerns that exports could be trending down, but Lo counters that this is not a huge concern. She attributes the drop in exports to a combination of factors including the Lunar New Year effect, when exports normally slow during the festive period. "The fourth quarter 2003 number was very strong for exports. In October and November exports grew over 30%. I suspect that it is a combination of both VAT rebate cut, effective this year, as well as the holiday impact. The decline was basically a timing issue," says Lo.

She adds that even if a materials shortage currently faced in parts of China does slow exports slightly, the effect will be offset by robust domestic consumption. "Exports could slow a bit, but this will be offset by the domestic consumption, which is growing. Domestic consumption has been given a boost by a rise in agricultural food prices. This has been part of the government's policy to help the farmer's income grow. So I don't think the slowdown in exports will have a big impact in the long run because Chinese companies are very efficient and cost competitive."