It was expected that last year’s inclusion of Chinese A-shares, stocks listed on mainland exchanges rather than in Hong Kong, into the MSCI Emerging Markets index would lead to an inflow of investor capital. At the time, the largest emerging markets index in the world controlled around £1.6 trillion in assets directly with another £9 trillion in capital linked to it.
Unfortunately for China’s stock market, the June move roughly coincided with mounting evidence the country’s economy is slowing down. The Chinese economy has been the engine of global growth for close to 3 decades now and its role in the recovery from the international financial crisis, which largely passed it over, was crucial. However, it always had to slow at some point and that point looks like now, with growth at its lowest rate in 28 years.
6.6%, China’s 2018 GDP growth, is still much higher than developed markets such as the USA, UK and Western Europe. But with GDP per capita in China still at a low base, higher growth rates are needed to translate into significant rises in corporate profits and living standards. Hopes of a ‘soft landing’ haven’t been helped by the U.S.-China trade war that started last July and a wider international equities markets sell-off that has hit emerging markets particularly hard.
The net result has been an outflow of investor capital from China despite the MSCI Emerging Markets index inclusions. Asset managers believe that growth in China will continue to slow despite the prospect of new government economic stimulus such as tax cuts. A growing corporate debt burden among Chinese companies and the country’s shrinking current account surplus meaning a continuation of infrastructure spending at the same levels seen in recent history remains unlikely are seen as other negative influences to growth.
Despite the tougher environment, many asset managers do still see attractive investment opportunities in China. The economy is still growing quickly in comparison to developed market alternatives. It’s just a matter of those investing online making the right choices when it comes to China exposure.
State-owned companies or those in which the state has a significant stake or influence are to be avoided. They are generally inefficient and have poorer corporate governance which means investors often have no way of knowing about major problems until it is too late. Stocks that are exposed to growing consumer power in China are considered the best prospects. Especially those that won’t suffer directly from the trade war such as the USA, like digital products and services rather than manufactured goods.
Examples in that category include iQiYi and Pinduoduo, China’s equivalents to Netflix and Groupon. China’s tech sector has suffered from the same bear trend as Wall Street and valuations are currently more attractive than they were a year ago.
Insurance companies, particularly those strong in life insurance, are also considered a strong prospect. Despite theoretically still being a communist state, China lacks a strong social welfare system which means it is even more important to Chinese consumers to insure themselves. Ping An Insurance, the country’s biggest insurance company, is a favourite of international investors.
The general theme is that China will remain an important region for investors around the world. However, those investing online in A-shares or China-focused funds will have to be more savvy in their decision making than at any other point in recent history if they want to achieve strong returns.