Accessing China

Among the most pressing issues for investors today is what to do about China.
Among the most pressing issues for investors today is what to do about China.

Current exposure typically underrepresents China


Investors are exposed to China via global equity or bond allocations, emerging markets holdings, or other parts of their portfolios.

However, broad benchmarks typically underrepresent China, while China-focused benchmarks may provide an imprecise representation of the overall market.

Portfolios could be significantly underexposed to China*

Weight ranges for a traditional 60% equity - 40% fixed income portfolio

*Based on the Black Litterman model. Source: Ninety One.

Foreign investor underweighting is likely to persist even after initiatives to increase China’s inclusion in major benchmarks are completed.

 

 

Why make a dedicated allocation to China?

With China growing and widening market access, Chinese equity and bond markets have become large and diverse enough to accommodate a sizeable standalone allocation.

Taking an active approach through a separate allocation to China has the potential to improve the diversification, resilience and performance of your portfolio.

  • Alpha rich opportunities
  • Better access to a differentiated and potentially diversifying source of returns
  • A more efficient portfolio

 

 

Alpha opportunities

Chinese equity markets are less efficient than some of the world’s other major markets, suggesting alpha potential; they are also relatively volatile, with high dispersion between winners and losers.

China A – Size of the opportunity and room for liquid caps to re-rate

The onshore and offshore markets have a total market cap of US$12.6 trillion. China A-shares equate to US$6.7 trillion. To put the scale of this opportunity into context, the China A-share market comprises over 806 companies with a market cap over US$2 billion. This number of companies actually exceeds the equivalent figure for the US. 

Chinese equity market

Source: Bubble size indicates the total listed market caps for the stock universe in different markets. Universe: All active stocks with listed market cap >US$2bn. Note: Aggregate growth and valuations are calculated based on full-listed shares. Source: FactSet, I/B/E/S, MSCI, Ninety One, May 2019.

Chinese fixed income: Further growth potential

Even after a period of strong growth, China’s bond market has considerable room for further expansion, given its still-modest size relative to nominal GDP.

Size of bond market relative to nominal GDP (multiples)

Alpha opportunities - Chinese bond market

Source: Bank for International Settlements, December 2018

Significant room still for China’s bond market to grow and deepen.

Chinese markets are less efficient than some of the world’s other major markets, suggesting alpha potential

 

 

Differentiated and diversifying returns

Allocating to China can help diversify overall portfolio return, demonstrating low correlation versus other asset classes.

Differentiated and diversifying returns

Allocating to China fixed income can help diversify overall portfolio returns because China’s interest rate movements are predominantly determined by domestic factors.

 

 

Potential efficiency gains

Due to Chinese equities’ and bonds' correlation profiles, a dedicated China allocation can be complementary to both developed and emerging market investments and can result in a more efficient portfolio

Potential efficiency gains

Allocating to China fixed income can help diversify overall portfolio returns because China’s interest rate movements are predominantly determined by domestic factors

 

The value of investments, and any income generated from them, can fall as well as rise.

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.