Why China, why now?
NICHOLAS YEO, INVESTMENT MANAGER,
ABRDN CHINA INVESTMENT COMPANY LIMITED
China’s equity markets have grown into the second largest financial market in the world, after the US. This is a US$17 trillion market that is both deep and liquid. There are more than 5,000 Chinese companies listed onshore in mainland China and offshore, mostly in Hong Kong and the US, presenting vast opportunity.
Chinese markets are also becoming large and growing components of major global indices. For instance, Chinese equities now make up 33% of the MSCI Emerging Markets Index. If China A Shares (the shares of mainland China-based companies that trade on the two Chinese stock exchanges) were included fully (from the current 20%), this would push the overall weighting of Chinese equities to 53%.
A big driver of growth has been the Stock Connect programme, which was launched in 2014. This opened direct trading links connecting Shanghai and Shenzhen with Hong Kong, making A Shares more accessible to institutional investors outside the mainland. These days, any investor with a brokerage account in Hong Kong can invest in over 2,000 companies listed in Shenzhen and Shanghai. Two-way investor flows between mainland China and Hong Kong have flourished as a result.
Another draw is the low correlation of Chinese equities and other asset classes. In other words, A Shares provide a great opportunity to diversify portfolio risk and potentially enhance returns.
Investing in both the onshore and offshore markets offers an extensive range of opportunities across these markets. With the onshore market, investors gain greater exposure to unique sectors such as baijiu (a popular liquor), as well as the faster growing new economy ones like electric vehicles and batteries, specialist technology and niche industrial areas. As for the offshore market, investors gain more access to internet and e-commerce companies, along with investment opportunities in telecoms.
More broadly, China’s financial reforms continue to improve the accessibility and liquidity of the domestic market. With more international investors’ participation in the A-share market, it could shine a light on global best practice and help to raise governance standards of local companies over time.
abrdn sees tremendous opportunity in China, and the portfolio is well positioned to capitalise on key areas of structural growth.
- Aspiration: As incomes increase and living standards improve in China, rising affluence is leading to fast growth in premium, or higher value, goods and services in areas including cosmetics, travel and food and beverage. The consumer story is attractive because boosting domestic spending forms a central component of China’s reform agenda.
- Digital: Growing integration amid the widespread adoption of technology means a bright future for plays on e-commerce, cybersecurity and data centres supporting cloud services.
- Green: Policy makers globally are committing to a greener and lower carbon world and China is expected to have a transformational role to play. Investments in renewable energy, batteries, electric vehicles, related infrastructure, and environmental management all have a bright future. Grid parity will be game-changing.
- Health: Rising disposable incomes are driving demand for healthcare products and services. The opportunity set is diverse. The proposed holdings include a leading hospital, contract research providers and an internet healthcare platform.
- Wealth: Growing prosperity means structural growth for consumer finance, such as wealth management and insurance protection, as well as increasing investor participation on stock exchanges.
In China, standards of disclosure, reporting and access to management are increasingly moving towards international norms. Many Chinese companies are also moving up the quality curve steadily. China is already the leading global manufacturer of solar panels and wind turbines.
This quality aspect extends to the environment, social and governance (ESG) front as well. abrdn is finding that more and more Chinese companies are beginning to understand and appreciate the importance of, and value that can be created by, engaging with long-term investors and becoming more cognisant of ESG issues. Increasingly they are aware of their carbon footprint. They are realising that implementing sustainable practices can improve brand perception, customer loyalty and, ultimately, the share price. It can also help to guard against catastrophes that can have legal ramifications. abrdn is also engaging companies on social factors, such as how they interact with employees, vendors and society, explaining how supporting employee well-being can lead to a more productive workforce and help them to recruit and retain talent.
In all this, abrdn remains positive about the long-term prospects for Chinese equities and believes the private sector retains a critical role in ensuring that the Chinese economy continues to innovate and prosper and that China reaches its goal of being a moderately prosperous nation by 2035.
Risk factors you should consider prior to investing:
- The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment trusts are specialised investments and may not be appropriate for all investors.
- There is no guarantee that the market price of a Trust’s shares will fully reflect its underlying Net Asset Value.
- As with all stock exchange investments the value of the Trust shares purchased will immediately fall by the difference between the buying and selling prices, the bidoffer spread. If trading volumes fall, the bid-offer spread can widen.
- Investment trusts can borrow money in order to enhance investment returns. This is known as ‘gearing’ or ‘leverage’. However, the use of gearing can result in share prices being more volatile and subject to sudden or large falls in value. Where permitted an investment trust may invest in other investment trusts that utilise gearing which will exaggerate market movements, both up and down.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
- Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
- Specialist funds which invest in small markets or sectors of industry are likely to be more volatile than more diversified trusts.
Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.