Over the last few years, we are seeing more investors getting comfortable with saying Hello and welcoming international investments to their portfolios. Most of them, and rightfully so, have begun their exposure with US funds. Given that the US is the largest economy in the world, makes up more than 50 percent of global market capitalisation of equities, and provides access to global brands that many of us are very familiar with in our daily lives, this is not surprising. But, we believe it is time for investors to begin looking beyond the US in the next phase of their global investment journey and also welcome China into their investment portfolios.
Fundamental reasons to take exposure to China:
-China is already the world’s second-largest economy in the world by many a mile, and is expected to overtake the US as the world’s largest economy by the latter part of this decade.
-It is the world’s manufacturing superpower and accounts for more than one fourth of all global manufacturing output. Whilst a China plus one manufacturing strategy is being adopted in many parts of the world, the supply chain integration is deep and China is likely to continue to be a major global manufacturer going forward as well.
- The country is a large contributor to global consumption growth and the Chinese consumer is very wealthy and now accounts for about 35 percent of global spending on luxury goods, up from less than 20 percent a decade ago.
-With patent applications in China in excess of 70000 per annum, China now files more patents globally than the US, Germany or Japan, which many of us believe are the countries where global innovation is taking place. Clearly China is doing very well in this arena.
Should you be concerned about news flow from China?
Over the last few months, there has been a large amount of news from China that has had global investors concerned. It started with the last minute cancellation of the Ant financial IPO in late 2020, which was expected to be the world’s largest IPO and created a frenzy with investors. The last minute withdrawal of the IPO was completely unexpected. There has been a spate of regulatory actions subsequent to that, impacting Chinese internet and technology businesses resulting in some of the largest Chinese technology names like Alibaba and Tencent down between 40 percent-50 percent from their peak prices ever since.
The restrictive actions on online education and after school tutoring by converting them to non-profits also resulted in significant losses for investor portfolios, and further steps like restricting gaming to three hours a week for individuals below the age of 18 years, have worried investors. One needs to remember though, that even post these sharp corrections, many of the large Chinese technology stocks are up meaningfully over the last five years. With the Chinese Communist Party ( CCP ) 20th National Party Congress expected to take place in 2022, the equivalent of a Chinese election, one can continue to expect volatility in both regulatory actions and Chinese stock markets going forward. We need to remember though, that volatility is common in most parts of the world heading into elections and therefore investors are exposed to political uncertainty in any part of the world that they invest in, including India and the US. We also need to keep in mind that Chinese equity valuations are broadly in line with their long term averages, unlike most other parts of the world where they are at a significant premium.
How should you invest into China?
Exposure to China can currently be taken either through feeder funds that are investing in emerging markets/Asia, wherein Chinese companies make up between 35 percent and 45 percent of emerging market portfolios, or through ETFs that invest in Emerging markets/Asia through the Liberalised Remittance Scheme (LRS) that permits international investments. Alternatively, investors can participate through Greater China funds that invest into the Greater China region which includes Hong Kong and Taiwan. In order to deal with the expected volatility, investors can stagger their investments through SIPs/TPs over the next 12-18 months to deal with the regulatory uncertainty leading into the 2022 CCP meeting. Existing investors should stay invested as the benefits of Chinese growth and relatively lower correlation with Indian equities can add significant value to investor portfolios over the long term.