Why take an all-China approach?

Taking a holistic view that considers the breadth of opportunities in Chinese equities opens up alpha and diversification potential.

Oct 12, 2020

10 minutes

Greg Kuhnert
Wenchang Ma
Taking a holistic view that considers the breadth of opportunities in Chinese equities opens up alpha and diversification potential.

The fast view

  • China has led the way out of the COVID crisis and investors are realizing the return potential and diversification benefits of making a separate allocation.
  • There are two ways to allocate – all-China, which includes onshore and offshore securities; and China-A investing in onshore only.
  • We believe alpha is best captured through a holistic all-China approach that considers the breadth of the Chinese equity markets and maximizes exposure to best ideas.
  • Historical analysis over 5- and 10-year periods show all-China offers attractive risk-adjusted return potential.
  • Some advantages of an all-China approach include:
    • Better representation of the Chinese economy and greater balance by sector.
    • Flexibility to invest across the Chinese equity universe – helpful at a time where there are increasing number of new public listings on both the offshore and onshore markets.
    • Price and trend differences between these markets – opening up the alpha opportunities available to investors.
  • We believe the 4Factor investment process is well positioned to take advantage of the behavioral bias inherent in Chinese equities.

In order not to miss out on the breadth of opportunities available in China, we believe investors should therefore take an all-China approach, i.e. flexibly investing across domestically-listed A- and B-shares, Hong Kong listed H-shares, red chips, P chips and US-listed American Depositary Receipts (ADRs). This leaves a universe of over 6,000 stocks, equating to approximately US$ 12 trillion of market cap, accessible to investors.

Source: Bloomberg, Ninety One, January 2020

Capturing better risk-adjusted returns through an all-China approach

10-year returns and volatility:

5-year returns and volatility:

Source: Bloomberg, eVestment, 30 June 2020.

In this viewpoint, we discuss the benefits of taking a wide lens to China’s equity markets and explore how an all-China approach has the potential to achieve attractive risk-adjusted returns through a proprietary 4Factor investment framework.

Read more here

Specific risks
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

General risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Greg Kuhnert
Portfolio Manager
Wenchang Ma
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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