Investors told "China isn't a top concern"

China's stockmarket continued to spiral downward on Tuesday after authorities failed to put a cap on selling that saw the Shanghai Stock Exchange Composite index shed 8.5% on Monday - its largest one day decline in over eight years.

On Tuesday the Shanghai Composite saw intra-day declines of around 3%, with the index eventually closing 1.7% down. The slides come after a brief period of stabilisation in Chinese markets, following weeks of volatility that saw stocks fall back close to 30% in July after six months of astronomic gains.

A number of UK-listed investment trusts invested in China have suffered deep losses as a result of the crash. JPMorgan Chinese is one of the worst affected, with shares down nearly 25% in the three months to 28 July while Money Observer Rated Fund Fidelity China Special Situations has seen its shares slide 20% over the period.

Domestic issue

The sell-offs have pushed the trusts' share prices to net asset value discounts to 16.8% (JPMorgan Chinese) and 20.4% (Fidelity China Special Situations) - well below their 12-month averages.

Open-ended funds suffering from the sell-off include HSBC Chinese Equity, Threadneedle China Opportunities, Allianz China Equity and Baring Hong Kong China, all of which have shed over 20% in the past three months.

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However, according to Lars Kreckel, equity strategist at Legal & General Investment Management, UK investors shouldn't be concerned by the sell-off in China, which he says remains a largely domestic issue. "Many investors are concerned that China's stockmarket falls will spill over into other regions, but we think it's an isolated event that won't significantly impact international markets.

"First, most of the volatility in China has been in A-shares, a category dominated by domestic investors. Secondly, foreign investors are also unlikely to become forced sellers of global equities as they did not participate in the rally, and thirdly, let's not forget that the Chinese market is still up 80 to 90% year-on-year," says Kreckel.

Likely outcome

He argues that the US Federal Reserve's impending interest rate hike, expected in September or December this year, should be of greater concern to investors. Kreckel sees a fall in global equity markets of around 8% as "a likely outcome".

Laith Khalaf, senior analyst at Hargreaves Lansdown, echoes Kreckel's sentiments on China, adding that while more volatility can be expected in the short term, China remains an attractive investment prospect over the long term.

"In the near future we can expect more thrills and spills from the Chinese stockmarket. The bubble that has built up over the last year from domestic investors trading on margin finance may yet have further to unwind.

"The long-term picture is more encouraging. While the exact figures are disputed, China's economy is still growing at a higher rate than western economies, a positive backdrop for many of the country's companies. Meanwhile the market appears to be gradually opening up to foreign investment," says Khalaf.

Khalaf says that investors looking to gain exposure to China should "probably" do so through a broader Asia Pacific fund; however, "those with strong stomachs" and "well-diversified portfolios" might consider a specialist China fund.

For these investors, investment trusts such as JPMorgan Chinese or Fidelity China Special Situations may be particularly attractive due to their closed-ended structures, which control outflows, and their widening discounts.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.