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*
*Based on the Black Litterman model. Source: Ninety One.
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.
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.
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: Ninety One, FactSet, I/B/E/S, MSCI, Goldman Sachs Global Investment Research, January 2021.
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)
Source: Bank for International Settlements, Bloomberg, Ninety One calculations, 30 June 2020
Significant room still for China’s bond market to grow and deepen.
Allocating to China can help diversify overall portfolio return, demonstrating low correlation versus other asset classes.
Allocating to China fixed income can help diversify overall portfolio returns because China’s interest rate movements are predominantly determined by domestic factors.
China A shares correlations to major asset classes
Source: Bloomberg, December 2020.
Onshore CNY Bonds: Bloomberg Barclays China Treasury + Policy Bank Index; Offshore USD China Bonds: JP Morgan Asia Credit Index China; Global DM Bonds: JP Morgan Government Bond Index Global Unhedged USD; Global DM Equities: MSCI World Index; Global EM Local Bonds: JP Morgan GBI-EM Global Diversified Composite Unhedged USD; Global EM USD Bonds: JP Morgan EMBI Global Diversified Composite; Global EM Equities: MSCI Emerging Markets Index.
Correlations calculated based on monthly returns data, from 1Q2011 to 4Q2020.
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
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.