Further gains in Chinese equities expected

Chinese equities are likely to continue exceeding investors' expectations during the coming years, according to Philip Ehrmann, manager of the Jupiter China Fund.

The Fund, which celebrated its first anniversary on 20 October with a return of 101.92% compared with 52.24% for the sector average, believes that while Chinese shares have enjoyed a very strong rally over the past year, there are a myriad of factors supporting further gains, particularly for medium and smaller companies, where valuations remain more attractive than among larger stocks.

He commented: "Chinese companies listed on the domestic 'A' share market have seen far greater rises in the past year than those listed on the Hong Kong exchange, where most foreigners invest. However, these gains are being supported by strong growth in profits - 'A' share companies have reported earnings growth of 62% year on year, excluding any financial gains they have made from playing the stock market.

There are also other factors supporting share prices. Both consumer spending and infrastructure expenditure remain strong, which will act as a strong support for shares in these sectors. In addition, the extension of the QDII programme (which allows financial institutions to invest in overseas assets) has, for example, exceeded all expectations as China's retail investors have eagerly sought to gain exposure to international markets.
The Jupiter China Fund has benefited from playing both these themes in the year since its launch, with stocks such as China Shenhua Energy, China Oilfield Services and financial services company Min Xin.

Philip said: "China remains one of the fastest growing economies in the world, despite a slowdown in the US economy. We are confident that growth in China's infrastructure expenditure and consumer spending will stay strong in coming years as the government is aiming to raise living standards in the relatively poor rural regions.

"Much of the gains we have seen in Chinese shares have been focused on larger companies and valuations of some stocks in this part of the market are looking stretched. There are, however, plenty of high quality medium and smaller companies producing strong earnings growth where share prices continue to look good value and this is where we are focusing our efforts. In addition, the Fund should benefit from China's ongoing deregulation, prompting significant flows into Hong Kong and perhaps Singapore where most of our holdings are listed."