The sustainable investor for a changing world
city-from-above

A standalone allocation to China

Outlooks & Research

Daniel MORRIS
 

-

Allocations to Chinese equity and fixed income should stand alone rather than be part of global or emerging market strategies for investors looking for diversification and potential excess returns from the vast opportunity set that Chinese financial assets represent.

In our new white paper, we argue that a standalone allocation would do justice to China’s growing weight in major global market indices and its maturing financial markets. We believe a strong regulatory landscape and rising international participation enhance the institutionalisation of a market.

With Chinese assets historically showing a low correlation with developed markets and other emerging markets, simply increasing one’s exposure to China via a higher allocation to emerging markets is suboptimal.

Investors would miss out on alpha opportunities from the large dispersion in performance between Chinese equity sectors and individual stocks and from new companies listing.

While the Chinese stock market has grown to represent the largest share of the MSCI Emerging Markets index, fixed income still accounts for a small percentage of major bond indices. The percentage is growing, however, making investing in the country’s bonds part of the global opportunity set for investors, not just an emerging markets opportunity.

The appeal to foreign investors of the Chinese bond market is relatively high yields, a stable currency, and low correlations with other local currency emerging market debt. In addition, there is often a negative correlation with the domestic A-share market.

China’s bond market is the second largest in the world, but most emerging market debt investors have at most a negligible allocation in their portfolios. We believe this market offers the potential to obtain above-average, risk-adjusted returns, especially for those who have the skills and experience to analyse it.

FOR A DETAILED ANALYSIS OF THE OPPORTUNITIES, READ A STANDALONE ALLOCATION TO CHINA


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

On the same subject: