This seems at odds with the behaviour of the Chinese stockmarket over recent years, with the MSCI China index having fallen by more than 50 percentage points since the beginning of 2020, and by 30.9% over the past year alone, according to FE Fundinfo data.

The pressures weighing on China’s economy and stockmarket are discussed in this month’s cover story, where we look at whether investors are being compensated for the risks in light of depressed valuations. And, in this month’s ‘A letter from’ on page 8, Fund Selector Asia’s regional editor Rupert Walker provides on-the-ground views on Chinese  quities from Hong Kong.

Our ‘Head to head’ on page 42 also debates the pros and cons of investing in China, with Liontrust’s James Klempster arguing that a poor year for China will still see higher rates of growth than most of the developed world, while Matthews Asia’s Andrew Mattock warns the Chinese government must act soon to avoid a Japanese-style ‘lost decade’.

Our contributors to this month’s ‘Four views’ on page 14 take a broader view on emerging markets, though China remains at the forefront of the discussion given it accounts for 23.8% of the MSCI Emerging Markets index.

Interestingly, a number of fund selectors who are positive on China do not hold exposure to China-specific funds. They instead gain exposure through global emerging market or Asia-Pacific portfolios, with Downing’s Simon Evan-Cook explaining on page 29 that he trusts his managers here to “manage [his] Chinese exposure sensibly”.

Liontrust’s John Husselbee adopts a similar approach, adding: “Until there is a sufficient number of fund managers offering Asian ex China, or EM ex China funds, you have little choice but to just select Asia and EM funds.”

FE data shows that, while the average IA China/Greater China fund has fallen by 51.3% over three years, the average IA Global Emerging Markets fund has lost just 16.7%. In contrast, the average IA India/Indian Subcontinent fund has gained 45.5% over the same time frame.

Should fund selectors rely on GEM fund managers to toggle their regional exposure through their expertise, or should they allocate to country-specific funds as alpha kickers? I suspect those who have invested in India funds, and those who have invested in China-specific funds in recent years, may have differing views on the subject.

The problem intensifies further down the cap spectrum, with the MSCI United Kingdom Small Cap index returning less than half of the broader UK index again, with gains of 13.9% over five years versus 36%. And, while global small caps have underperformed the global multi-cap index by 17 percentage points, they have still managed to achieve a total return of 50.7%, meaning they have more than tripled any gains seen in the UK.

The headwinds looming over the UK are complex and multi-faceted, and smaller companies are typically perceived as being more sensitive to economic concerns than their larger peers.

But this is a common misconception, according to Abrdn’s Andrew Paisley. “Most investors think smaller companies underperform in a recession. In most cases, they are correct,” he says. “However, what’s less well-known is that small caps usually exit recessions quicker than assumed – outperforming large caps. This rebound can begin as early as three months into an economic downturn.” He explains this happens because markets tend to price in an economic recovery before it actually happens.

Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler, agrees that UK small caps often outperform after periods of difficulty. His research shows that, since 1955, every negative year the Numis Smaller Companies index has suffered has been proceeded by three positive years, with an average return of 84.4%.

“Current valuations of UK smaller companies offer further validity to their investment case,” he adds, with the FTSE Small Cap index currently trading on a priceto-earnings multiple of 9x. According to data from Schroders, whenever the smallcap index has traded below a P/E of 10x, the average return over the following 12 months has been 36%, and over the next 24 months, this figure increases to 60%.

And if valuations and historical performance data (which of course is no guide to future returns) offer no solace to investors, given just how tricky the UK’s backdrop is to navigate at the moment, some more bullish UK small-cap investors suggest we could even be at the start of a performance ‘supercycle’.

Readers can make their own minds up as to whether this is on the cards or not but, for now, they can read more insights into UK smaller companies on page 20.