Why China is about to become a larger part of your portfolio
China is home to many of the world’s largest and fastestgrowing companies, which this week took a significant step towards the investment mainstream.
Yesterday, MSCI – a major provider of indices followed by many tracker funds – started to include a number of Chinese “A shares” within its Emerging Market and All Country World index series.
China’s A shares are those listed on its mainland stock exchanges in Shanghai and Shenzhen. Previously, only Chinese companies listed in Hong Kong had been included.
Because MSCI’s indices are used as the benchmark for trillions of pounds worth of assets, the newly included Chinese shares will start to see extra investment flow their way.
For example, the $5.8bn (£4.4bn) iShares MSCI EM exchange-traded fund (ETF) tracks the MSCI Emerging Markets index. It will be forced to buy the newly included shares to avoid deviating from that benchmark. The MSCI Emerging Market index series has around $1.9 trillion (£1.4 trillion) in assets benchmarked to it.
Charlie Awdry, manager of the Janus Henderson China Opportunities fund, said: “We have been investing in A-share companies for many years, and newcomer investors may be positively surprised by the quality of some of these companies.”
The inclusion of the A shares will happen in tranches. To begin with, around 230 companies – mainly large firms – are being added, and will account for less than 1pc of the index.
There will then be further phases of inclusion that may extend to midsized and smaller companies. If fully included, A shares would take up around 18pc of the index, according to Reuters.
That is in addition to the 30pc of the index already taken up by Hong Kong-listed shares, meaning Chinese stocks could end by taking up almost half of the MSCI Emerging Markets index. The weight of China in the All Country World index will also rise significantly from its current 3.7pc.
China is a long way from being a pivotal part of an investor’s portfolio in the same way that American and British shares are, but its importance is growing.
Matthew Vaight, manager of M&G’s £1.9bn Global Emerging Markets fund, said: “With 3,500 stocks, the A shares market is a vast and exciting source of potential. Compared with stocks listed in Hong Kong, the companies are far more consumer-focused, and provide exposure to the increased consumption of goods and services.”
One significant concern most investors have about China is over transparency and corporate governance.
MSCI itself has warned investors that the companies being added have low environmental, social and corporate governance standards compared with shares from many other countries. It is also consulting “extensively” on how to improve the functioning of the market, which often suffers from stock suspensions, according to Mr Awdry.
“Management quality, shareholder focus and transparency at mainland companies are generally poor. In our experience, these issues make it hard for investors to truly understand how a company operates,” said Mr Vaight.
Mike Gush, manager of Baillie Gifford’s Greater China fund, said: “The investment opportunities in China remain world class. Economic growth continues at a high and sustainable level, with a growing emphasis on consumption. We believe MSCI’s move could herald the start of China’s domestic markets becoming an asset class in their own right.”
China is a volatile and risky market. Long-term investors have done well, but experienced a huge rise and fall in 2014 to 2015. The MSCI China A Share Onshore index is still more than 30pc below its 2015 peak.
Most investors would arguably be best served keeping China as a small part of their portfolio for now, through a broader emerging markets, Asia or global fund that invests in China.
BlackRock Asia Special Situations, one of our Telegraph 25 favourite funds, has a significant proportion of its money in China.
For those with a strong view, or who want to invest in Chinese stocks without investing in everything else that comes with a broader portfolio, there are a number of specialist funds and investment trusts to consider for a small holding.
Fidelity’s £1.4bn China Special Situations trust is a popular option. It charges 1.16pc a year and currently trades at a 14pc discount to the value of its assets. Over the past year the discount has ranged from 10pc to 16pc.
Shares listed in Beijing are entering the investment mainstream, writes James Connington ‘With 3,500 stocks, the A shares market is a vast and exciting source of potential’
China’s explosive growth continues, but it is still a risky and volatile market