Moscow to Beijing – Trans-Siberian investing

Russia

Since the civil unrest in Ukraine began, Russia has been on the receiving end of a number of sanctions from the rest of Europe – as well as imposing some of its own.  The continuation of the unrest and Russia's seeming reluctance to do anything to help resolve the issues has finally taken its toll on the investment community.

In July investors pulled $353 million* from Russian equity funds, followed by a further $172 million*, after the tragic disaster involving the Malaysian passenger plane. Total, the major French oil company, which owns 18% of Russia's natural gas producer Novatek, also stopped buying shares in Novatek earlier this month.

As a result, Moscow's main dollar-traded index has fallen 14% since the end of June, while in China, one of the main beneficiaries of the move from Russian equities, the Shangai-Shenzhen index has risen by 11%.

China

$1.6 bn was invested in Chinese equity funds in the last week of July alone - the largest amount since April 2008**. It has been a beneficiary of the exodus from Russian equities, as well as the fact that wary investors now believe much of the bad news from the economy has been priced in to the market.

The research team at Chelsea feel that China still needs to go though a period of deleveraging and quite a bit of reform is required as it transitions from an investment-led to consumption-led economy, and in the short-term, we remain cautious on the asset class. However, in the longer term the key drivers are still in place and China will be a major player in the global economy for many years to come.

For most people, we believe monthly investing in Chinese equities is a smoother route to take. Yes you may miss out on some spectacular gains, but if it isn't plain sailing, it means you can better stomach the volatility.

We also believe that the days of high double-digit returns from Chinese equities are behind us and a more realistic outlook is required. You can still get some good returns from China, but the way it is done may be subtly changing – for example, by investing in dividend-paying companies.

In a slower growth economy, these payments can make a huge difference. As in other areas of the world, Chinese companies paying dividends tend to have more conservative management who don't waste money and the dividend pool there is growing fast, with a six-fold increase since 2000. If you can get around 3% per annum in income, you only need mid-single digit growth to get a very attractive combined total return. To us that's much more realistic.

Whilst a lot of money has recently been placed into the Chinese market it seems a risky bet and only one worth taking with spare investment money, certainly not for the majority of your life savings.

* source, fund tracker EPFR as at 13th August 2014
** source, Morgan Stanley as at 13th August 2014