Tuesday 24 July 2012

Spotlight on China

A closer look at the FTSE China 25 Index

China at the moment is one of the best funds to invest in based on expected returns using our valuation method (see previous postings on adjustment rate and core funds valuations for more info). Estimated returns look close to 8% pa at present due to high growth rates for China and low PE ratios on the market at present.

The chart below shows the 5 year price action for FXC.L (ishares FTSE China 25 fund):



The credit crisis of 2008 resulted in some increased volatility. Following that the fund increased in value by 130% from its low in 2008 to its peak in 2010. Since then the price has been up and down without any clear trend. At present the fund is 38% below its peak in late 2007.

Due to the large size of the market that the fund covers (estimated market cap of the underlying stock in the fund total almost US$2trillion) we are less concerned with using technical analysis. (We reserve technical analysis for smaller funds, stocks and commodities. Stocks and small funds are riskier and technical analysis can give warning signs of information that is not always visible from fundamental analysis alone. For commodities technical analysys is used as trends tend to continue for longer periods to waiting for the right time is critical)


 

Sector Allocation

The pie chart below shows the sector allocation of the FTSE China 25 index (remember this index only contains 25 stocks):



As you can see the fund is pretty heavy on financial stocks making over 50% of the index.

Let's take a closer look at the main financial companies that make up the index. The table below summarises the data:


Stock
Market Cap
PE
Div
High
Current
Change
China Construction Bank
US$160b
5.70
5.3%
1.09
0.62
-43%
Ind & Comm Bank of China
US$203b
5.65
5.4%
0.91
0.53
-42%
Bank of China
US$115b
5.04
6.2%
0.66
0.36
-45%
China Life
US$86b
30.27
1.4%
81
40
-51%
Ping An Insurance
US$60b
19.80
0.3%
24.30
15.54
-36%

The banks are all on modest PE ratios of 5-6 and pay generous dividends. The banks are all more than 40% below their high prices so some downside risk has already been removed. The insurance companies look a bit more pricey but those too have seen significant falls.

The high concentration of the index on financial stocks makes me a bit wary. The banks look reasonably priced and are discounted from their highs so their is some upside potential. If you can stomach having over 50% of your assets in financial stocks then the returns do look attractive. I think the lack of diversity in the fund and the sheer complexity of valuing financial stocks means this fund probably shouldn't make up a significant part of your overall portfolio, certainly less than 25%.






6 of the Best Portfolio (Mid/End July; Update)

The "6 of the Best" portfolio that began in June is still going strong. It is now up over 10% (as a crude benchmark the FTSE 100 index is up less than 2% over the same period).

If you remember the 6 of the best portfolio invests in 6 different funds. One core fund which is a large international or regional equity fund, an additional equity fund which can be any size or country or region, a bond fund (corporate or government bonds), a FTSE100 stock, a REIT fund and a commodity fund.

The table below shows our current holdings:


Fund
Ticker
Holdings
Price
Value
%
WPP
WPP.L
227
799p
£1,814
16%
FTSE China
FXC.L
29
6121p
£1,775
16%
Far East ex Jap Small Cap
ISFE.L
116
1519p
£1,762
16%
Wheat
WEAT.L
1,400
$2.29
£2,068
19%
UK Corp Bond
SLXX.L
14
12722p
£1,781
16%
Asian Property
IASP.L
123
1466p
£1,803
16%
Cash



£32
0%
Total



£11,035


The majority of the gains have come from a very successful trade in Wheat (WEAT.L) which is up 43% since mid June.


It's now time to sell wheat as we have a potentially better trade available in natural gas which has broken it's 100 day high for the first time in 4 years and looks a very promising investment with estimated returns of over 15% a year from our valuation model.

Therefore the new portfolio (with some rebalancing) looks like this:


Fund
Ticker
Holdings
Price
Value
%
WPP
WPP.L
230
799p
£1,838
17%
FTSE China
FXC.L
30
6121p
£1,836
17%
Far East ex Jap Small Cap
ISFE.L
121
1519p
£1,838
17%
Natural Gas
NGAS.L
21,928
$0.13
£1,839
17%
UK Corp Bond
SLXX.L
14
12722p
£1,781
16%
Asian Property
IASP.L
125
1466p
£1,833
17%
Cash



£70
1%
Total



£11,035


The Asian Property Fund (IASP.L) goes ex div tomorrow and will pay approximately a GBP24 dividend for our holdings. No other income on the fund is due at present.

Trading Update (FTSE100)


If you recall our list of FTSE100 stocks here we will have a quick look to see how they are performing:


Stock
13th July
24th July
Change
RSA Insurance
109p
107.5p
-1.4%
ICAP
310p
303.8p
-2.0%
BAE Systems
306p
305.7p
-0.1%
AstraZeneca
2,937p
2,958p
+0.7%
Morrisons 
270p
273.6p
+1.3%
Legal & General
129p
124.7p
-3.3%
WPP
797p
803.5p
+0.8%
Tesco
314p
316.4p
+0.8%
Antofagasta
1,071p
1,039p
-3.0%
Old Mutual
156p
153.4p
-1.7%


Admittedly it's been less than 2 weeks since the last update but I thought I would add it to this post out of consistency. The performance hasn't been great with an overall fall of 0.79%. It compares well to the FTSE which has fallen 2.12% over the same period.

Overall since inception on the 28th of May the top ten in our list is up 6.81% compared to 3.51% up for the FTSE100.