China – time to chop or stick?

China is the world’s fastest-growing major economy and what happens in this economy has a domino effect on the rest of the world. When China’s rate of growth slows, the price of shares tumbles. Its most dramatic fall began with the bursting of the stock market bubble on 12 June this year. Within a month, the value of shares on the Shanghai Stock Exchange had dropped by a third.

However, with China’s leader Xi Jinping recently announcing that annual growth of around 7 per cent over the next five years could be maintained, is it time to think again about investing?

Private investors have been withdrawing from the market since it started to tumble from its peak according to data from the Investment Management Association (IMA). It is not surprising that they are nervous. Latest trade data showed a near 7 per cent drop in exports and sparked fears of a “hard landing” for the economy. So investors may still be in for a bumpy ride.

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This is what you need to know:

WE ARE ALL AFFECTED:

You are already exposed indirectly – your pension and ISAs are probably already exposed to the Chinese economy because it is a major trading partner of many UK blue chip companies. If the Chinese economy really starts to suffer, you may have to review your entire portfolio and investment strategy.

CONSUMERS IN CHINA ARE GROWING:

Growth in China could still average 7 per cent over the next few years and as it shifts towards a more consumer-led economy it might be time to consider investing in companies that will benefit from this growth.

SOME UK FIRMS WILL BENEFIT:

Following the recent State visit of Mr Xi, £30 billion of investment and deals were agreed. These include a stake in the first nuclear power plant to be built in the UK for a generation (run by EDF), £2bn for busses (with Alex Dennis Ltd), funding for a new London Paramount Entertainment Resort, £50 million for Aston Martin sports cars and a similar amount for the London Taxi Company. There was also a deal with Merlin Entertainments to build a Legoland theme park in China.

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THOSE WITH EXPOSURE SHOULD CONSIDER HOLDING TIGHT:

Many investors seek to invest when a market has fallen in the hope that share prices will soon recover. Yet many investors buy at a peak and sell when shares plummet. It inevitably means a loss.

If you can afford to ride out the volatility, it might be worth holding on for a recovery. Also bear in mind that even if you have a proportion of your portfolio invested in China or an Asian fund, you are unlikely to be exposed to the full falls in the Shanghai Composite as this is closed to international investors. Instead you are probably invested through the Hong Kong stock market, which has historically been less volatile, and have stakes in other emerging Asian countries too.

DO YOUR RESEARCH:

Investing via a diversified fund spreads the risks and puts the investment decisions into the hands of experts. At sites such as youinvest.co.uk you can track fund performance and research investment options. At the time of writing the best fund had grown by 21.6 per cent this year, with the poorest performer losing -0.28 per cent of its value. Performance depends on what investments each fund holds and the style of management. Always know what you are investing in.

SPREAD YOUR RISK:

While you may want some exposure to the giant economic powerhouse of China, you will probably be advised to put only a small proportion of your entire portfolio in this market. As with any investment decision, spread your money around several funds, do not invest what you cannot afford to lose and be prepared to invest for the long run. Also look at the risk rating – funds are generally ranked as either “above average” or “high” risk.

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Please note the value of investments, and any income from them can go down as well as up and you may not get back your original investment. AJ Bell Youinvest do not offer advice about the suitability of their products or any investments held within them. Should you require financial advice you should consult a suitably qualified financial adviser. Tax rules can change in the future and the tax treatment depends on your personal circumstances. Past performance is not a guide to future performance and some investments need to be held for the long term.

AJ Bell is authorised and regulated by the Financial Conduct Authority. The Evening Standard is not responsible for the content of this advertisement feature and any queries should be directed to AJ Bell.