Why Aussie investors are missing the China boom
Most local investors are entirely missing the potential returns of emerging heavyweights such as Tencent, Alibaba and Baidu, writes VanEck's Arian Neiron.
Most local investors don't own Chinese companies within their portfolios, and could be entirely missing the potential returns of Tencent, Alibaba and Baidu.
Though China has the world’s second largest economy and share market, most people don’t own Chinese equities. Global equity portfolios typically invest in companies like JP Morgan, Apple and Google but mention the likes of Industrial and Commercial Bank of China (ICBC), Tencent and Alibaba and most investors would have blank looks on their faces.
Yet combined, those three companies have a market capitalisation of around $1.76 trillion, almost the entire size of the S&P/ASX 200. And they are growing quickly too. Recently, Alibaba said it expects revenue growth of over 50 per cent for 2019. The technology conglomerate founded in 1999 with a market capitalisation of around $660 billion has experienced a four-year average annual revenue growth of 54 per cent.
Separately, Tencent has an astonishing growth rate of 750 per cent in five years, or 53 per cent annualised. The company recently revealed in its first quarter 2018 results that its revenue is still growing at 48 per cent year-on-year with advertising revenue growth of 55 per cent.
The inclusion by MSCI of China A-shares across its emerging markets and broad global indices during the 31 May rebalance is a game changer. The rebalance will result in the inclusion of 233 large cap China A-shares, which will represent 0.8 per cent of the MSCI Emerging Markets Index.
Longer-term, should the Chinese market continue to liberalise to the point of warranting full inclusion in the future, Chinese stocks – A shares and other share classes – could comprise 42 per cent of the MSCI Emerging Markets Index, with A shares alone accounting for about 16 per cent of index weight, according to MSCI.
While the percentages are small, given that US$1.6 trillion in global assets track these indices, according to JP Morgan, this adds up to a lot of extra demand for A-shares – some US$66 billion - and a likely uplift in valuations and game changer for the China stock market.
Not only will MSCI’s move help to boost China’s economic standing but flows into mainland China’s stock market will increase as fund managers and institutional investors seek to replicate MSCI’s indices, some of the most commonly used benchmarks globally.
Rising China A-shares
Until recently, China A-shares weren’t even part of the conversation. Today, the growing list of dynamic A-share companies with dominant local, and in some cases global, brands demands attention.
China A-shares represent the largest and most liquid shares listed on mainland China’s two main stock exchanges, Shanghai and Shenzhen. Yet they are significantly under-represented in most institutional, retail and self-managed superannuation fund portfolios despite the growth and diversity they offer. The technology sector, for example, is powering economic growth in China given it is a technology hungry nation, perhaps even more so than developed nations.
Other sectors are also growing, as the rise of the Chinese middle class propels economic activity and greater demand for infrastructure, consumer goods, financial services, construction, education, entertainment and healthcare.
Not only may MSCI’s move help to boost China’s economic standing, but flows into mainland China’s stock market will increase as fund managers increase their exposure to China-A shares to replicate MSCI’s indices.
A fear of missing out among fund managers has already driven flows to A-shares this year. MSCI’s index inclusion and the Chinese government’s opening up of China’s capital markets to foreign investors may, over the medium to long term, support the value of the China shares through increased liquidity and sophistication.
Investor benefits of China exposure
As China’s role in the global economy grows in importance, the size of its share market, its liquidity and sophistication will grow too. Given current unprecedented industrial upgrading and strong technology and consumption growth, there are a variety of sectors in China that are well poised to deliver potentially robust growth over the medium term. Getting in now ahead of the MSCI inclusion could potentially deliver significant benefits over the long term.
Accessing China exposure in a portfolio also helps investors increase diversification across both countries and sectors, such as technology and healthcare that are under-represented in Australia.
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Arian Neiron is the managing director and head of Asia Pacific at VanEck, one of the world’s largest ETF providers. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
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