AsianInvesterAsianInvester
Advertisement
partner content

The Case for a Dedicated China Equities Allocation

A China equities allocation makes sense when considering global growth, consumerism, foreign investment and the potential for higher returns. As an institutional investor or investment professional, being exposed to China has traditionally been an ancillary outcome of a decision to own emerging market (EM) equities. However, we believe there are potential return and risk benefits from considering China as an independent allocation.
The Case for a Dedicated China Equities Allocation

China is on a trajectory to becoming the world’s largest economy by 20241 and, as such, the country continues to be a destination for capital flows from investors seeking higher internal rates of return (IRR), alpha and diversification within their portfolios. Notably, the vast China domestic market has become more consumption-oriented, and Chinese corporations now find themselves well positioned to meet consumer demand.

Return/Risks from Beta

Owning China as a standalone allocation2 can help investors meet their return targets. Forecast returns, which comprise yield, earnings growth, valuation and inflation components, favour China. State Street Global Advisors’ long-term forward expected returns have a premia associated with owning China equities relative to EM equities (including China) of 9.02% versus 8.56%. By breaking out China from EM, investors can receive a more favourable return from owning the systematic risk, which is of course higher in a China-only exposure than a more diversified EM exposure.

China’s Growth Trajectory

China has become more consumption-oriented, relative to net exports or investment. Consequently, the Chinese have an increasingly higher influence on consumer behaviour. Chinese corporations find themselves well-positioned to meet consumer demand and gain market share, especially in online retail and technology industries. Relative to the $744.1 billion e-commerce market in the US,3 China’s e-commerce market is worth $1.2 trillion.4 This accounts for just 23.1% of overall Chinese retail spend,5 and it follows that there is plenty of potential for growth given the large population with booming access to digital technology.

China’s Transition to a Consumer Service-Based Economy

The government’s China 2025 Plan provides tailwinds to the continuation of these trends; the goal is to be the global leader in the design and development of high-margin industries. Furthermore, China’s Communist Party (CCP) is in the process of drafting the 14th Five-Year Plan of Social and Economic Development (2021–2025). The Plan will include a new economic model called “dual circulation,” which advocates for an economic rebalancing between globalisation and China’s economic self-reliance against the backdrop of rising US-China competition and continuous decoupling of global supply chains.

Foreign Direct Investment Trends

Foreign Direct Investment (FDI) within China - a strong indicator of sustainable growth - is trending upward, despite some protectionist policies that run counter to the liberalisation of trade in recent years. Protectionism is not likely a permanent global policy; however, the path towards a resolution can be steep and is unlikely to be linear. We expect participants to find common ground because the benefits of collaboration and efficiency are too numerous. Although 2020 data is not yet available from the World Bank, we expect pandemic-based economic disruptions will likely impact the FDI decisions of companies. The full impact on FDI flows will depend upon the success of public health measures to combat the pandemic, as well as economic policy responses.

Although there are countless strategies, theories and approaches to investing, there is one concept that nearly every investor agrees on: the value of diversification. Simply put, diversification means spreading your assets among a variety of investments with the aim of balancing risk and reward, and reducing overall volatility. A Greater China ETF investment provides instant diversification, giving access to over 800 securities and the four leading Asian equity markets - China, Hong Kong, Singapore and Taiwan, in a single trade - thereby helping to mitigate risk and providing the potential to improve returns.

Footnotes

1 Source: International Monetary Fund.

2 This section of the paper references State Street Global Advisor’s asset allocation forecasts. Forecast returns are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate. Data as of September 30, 2020.

3 2019 J.P. Morgan Global Payment Trends. E-commerce payments trends: China.

4 2019 J.P. Morgan Global Payment Trends. E-commerce payments trends: U.S.

5 2019 J.P. Morgan Global Payment Trends. E-commerce payments trends: China.

 

Risk Disclosure

For institutional / professional investors use only.

Investing involves risk including the risk of loss of principal.

The views expressed in this material are the views of Investment Strategy and Research through the period ended October 15, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. There is no representation nor warranty that such statements are guarantees of any future performance. Actual results or developments may differ materially from the views expressed.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.

Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852 2103-0200.

Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.

Australia: State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services License (AFSL Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia  Telephone: +612 9240-7600  • Facsimile: +612 9240-7611

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

© 2020 State Street Corporation.

All Rights Reserved.

3285730.2.1.APAC.INST

Exp. Date: 31/10/2021

 

 

¬ Haymarket Media Limited. All rights reserved.
Advertisement