Readers who enjoyed this newspaper’s revelations about the China spy fiasco might be less amused if they realised part of their pension is at risk. It would be hard to beat Rod Liddle’s analysis last Sunday of how the criminal prosecution of two men working in parliament, and alleged to be collaborating with China, collapsed.
So I won’t bother. Other than to briefly report that the prime minister, Sir Keir Starmer, claims the Crown Prosecution Service can’t prosecute because previous governments didn’t call China “a threat to our national security”. That lawyerly view must have Xi Jinping, leader for life of the People’s Liberation Army, quaking in his canvas sandals.
Previous prime minister and fellow sinophile Liz Truss didn’t last long — just 49 days — but her dreams of selling cheese to the Chinese seem to live on in Downing Street. Hopes of trade with the world’s biggest dictatorship have trumped tedious technicalities about defending our democracy.
Now British company pensions and tracker funds have billions of pounds invested in China, despite our director-general of MI5, Sir Ken McCallum, saying: “Do Chinese state actors present a UK national security threat? The answer is: of course. Yes, they do — every day.”
Coming down from the clouds of commercial jurisprudence and oriental espionage, your humble correspondent had better admit straight away that I was an investor in China after a couple of business trips to Shanghai and Shenzhen in the 1990s. Then I learnt about human rights abuses and sold all my shares in Fidelity China Special Situations (stock market ticker: FCSS) in 2020.
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Never mind what I think, the billionaire investor George Soros warned back then how many people’s retirement savings are exposed to the world’s second-largest economy. He said: “Pension fund managers allocate their assets in ways that are closely aligned with the benchmarks against which their performance is measured.
“The MSCI All Country World Index [ACWI] is the benchmark most widely followed by global equity asset allocators. These indices have effectively forced hundreds of billions of dollars into Chinese companies.”
That money could be caught offside if China follows Russia into open conflict with the West. Nor is there anything theoretical about this risk because many adventurous British investors were wiped out when power changed hands in China in 1949 and Russia in 1917.
No wonder City cynics define an emerging market as a market from which it is difficult to emerge. As it happens, one of the very first financial features I wrote as a cub reporter on Fleet Street nearly 40 years ago was about a reader in Hull whose grandfather had been a raging bull of emerging markets — and left a sea chest full of busted bonds, issued by the Tsarist government before it got booted out by the communists.
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More recently, after another business trip to Moscow in the 1990s, I bought shares in an investment trust, BlackRock Emerging Europe (BEEP), that focused on Russia. Back then, many occidental optimists invested in eastern emerging markets because we believed in Wandel durch Handel, the German phrase for “reform through trade”.
Sad to say, I was shocked to read about the attempted murder of Sergei and Yulia Skripal in Salisbury in 2018, and baled out of BEEP. Then, as now, some world-weary observers argued my reaction was emotional and excessive because “business is business”.
As things stand, emerging markets are enjoying a bull run, or rising prices, beating developed economies this year and sucking in hot money. While the average investment trust of any description added 17 per cent to shareholders’ wealth in 2025, the average emerging markets fund has gained 31 per cent. Meanwhile, China leads the way with an eye-stretching typical total return of 49 per cent, according to independent statisticians at Morningstar. Phew!
One explanation is that many emerging economies are benefiting from the weakness of the dollar, which lost 11 per cent of its value compared with other major currencies in this first half of this year, its biggest fall in half a century. Many relatively less developed countries have debts denominated in dollars and export commodities that are priced in dollars. So the weakness of the greenback gives them a double boost, from lower interest costs and higher income.
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Another explanation is that emerging markets funds had underperformed more mainstream rivals over the past decade and the present bounce-back reflects their former undervaluation. These trends could have some way to run but investors should always be wary of chasing past performance that might not be repeated in future.
Put another way, unscrupulous salesmen find it easy to sell funds that have already soared in value but, unfortunately, it is impossible for buyers today to benefit tomorrow from yesterday’s gains. That’s why this long-term investor continues to believe the first step towards making a profit is often to buy low.
Perhaps surprisingly, there are still several sectors where prices remain relatively low and might offer more scope for growth in future. To be specific, these include UK Equity Income, where the average investment trust has delivered a total return of 17 per cent this year.
Even among emerging markets, there are wide variations in valuations. For example, India, the world’s largest democracy, has seen the typical fund gain on 1.5 per cent this year, although its five-year return of 87 per cent remains far ahead of China’s 11 per cent loss over the same period.
Devan Kaloo, global head of equities at Aberdeen Investments, told me: “India is being mispriced. Investors are distracted by what India lacks — artificial intelligence hype — while missing what it has, resilient domestic growth.
“With pro-consumption tax cuts, India’s fundamentals are strengthening even as relative valuations fall below long-term emerging markets and China averages.”
Similarly, Gaurav Narain, manager of the India Capital Growth (IGC) fund, said: “In a year when virtually all other markets have risen, India has been left standing.
“But there are important pointers that sentiment is going to change, including cuts in income tax and interest rates. We should see a positive effect on personal consumption soon but most international investors are underweight India.”
Now might be a good time for this long-term investor to mention that my very first ten-bagger, or share whose price soared ten times, was JP Morgan India Growth and Income (JIGI) where I paid 63p in June 1996, for stock I still own and it now trades at £10.62. More recently, in September 2021 I paid £1.21 per IGC share that cost £1.70 on Friday.
So perhaps I am biased but I am still glad to have nothing to do with China’s forced labour camps, where more than a million people are confined. Of course, some investors were perfectly happy to back Germany in the 1930s, although I would not have been among them for any short-term gains.
Here and now, perhaps the row about alleged China spies lurking in parliament could prompt some pension fund members to examine their portfolios and beware leaning too heavily on past performance. As I may have pointed out before, the trouble with following the herd is that you might end up at the abattoir.