Your port­fo­lio is be­com­ing more Chi­nese

The Daily Telegraph - Your Money - - MONEY -

A change in the way stock mar­ket in­dices are drawn up will have far-reach­ing re­sults. By Harry Bren­nan

China is the world’s sec­ond largest econ­omy and, as it con­tin­ues to evolve from a closed-door na­tion to a more open one, it’s likely to be­come an in­creas­ingly im­por­tant part of your in­vest­ment port­fo­lio.

In re­sponse to its more out­ward look­ing at­ti­tude, FTSE Rus­sell, which com­piles many of the in­dices fol­lowed by tracker funds, has said that it will in­clude more Chi­nese shares in its global bench­marks from June 2019.

MSCI, an­other in­dex provider, made a sim­i­lar an­nounce­ment in June this year and is con­sid­er­ing fur­ther in­clu­sions fol­low­ing pos­i­tive feed­back from in­vestors.

The stocks that th­ese com­pa­nies are adding to their China in­dices are “A-shares”: those listed on main­land stock ex­changes in Shang­hai and Shen­zhen. Pre­vi­ously, only those Chi­nese com­pa­nies listed in Hong Kong had been in­cluded.

The newly in­cluded com­pa­nies are now likely to at­tract much more in­vest­ment, as the FTSE and MSCI in­dices are used to con­struct funds that ac­count for tril­lions of pounds worth of as­sets.

Pas­sive funds and ETFs (ex­change­traded funds) that track global and emerg­ing mar­ket in­dices will have to al­lo­cate money to a num­ber of com­pa­nies on the Chi­nese main­land to avoid de­vi­at­ing from their bench­marks when the lat­ter start to in­clude th­ese stocks. So, pri­vate in­vestors with money in those funds will see their ex­po­sure to the main­land Chi­nese mar­ket in­crease.

Ex­perts have broadly wel­comed the new in­clu­sions, say­ing pri­vate in­vestors will in­creas­ingly be able to ben­e­fit from a huge growth mar­ket. But they also warned of risks.

Hec­tor McNeil of HANetf, an ETF provider, said: “We have been wait­ing for quite a long time for China to be in­cluded in the bench­marks. There is a tremen­dous amount of growth, buoyed by a bur­geon­ing mid­dle class and the re­cent rise in con­sumerism.”

He said the de­ci­sion to in­clude Chi­nese shares had been put off for a num­ber of years. Firstly, China has his­tor­i­cally been a coun­try that likes to have sig­nif­i­cant con­trol over its own econ­omy and where its money comes from. Se­condly, in­vestors and in­dex providers have had con­cerns over the en­vi­ron­men­tal, so­cial and gover­nance risks posed by some com­pa­nies in a coun­try whose busi­ness cul­ture is some­times not as trans­par­ent as the West’s.

One short-term risk, Mr McNeil said, is the on­go­ing “trade war” be­tween China and Amer­ica. “It’s hard to call – some would say it has al­lowed for buy­ing op­por­tu­ni­ties, oth­ers that there is still more pain to come,” he said.

Gary Mon­aghan, an in­vest­ment di­rec­tor for Fidelity in Hong Kong, said: “MSCI and FTSE’s de­ci­sion to open their doors to A-shares is a di­rect nod to China’s ef­forts to lib­er­alise its mar­kets and wel­come the ad­vances of in­ter­na­tional in­vestors. But there is still some way to go in both for­eign ac­cess and over­all con­fi­dence.”

He ques­tioned the abil­ity of some of China’s less trans­par­ent com­pa­nies to stand up to “in­ter­na­tional scru­tiny” but said that in­vestors could not ig­nore the coun­try any longer.

China can be a volatile mar­ket. Long-term in­vestors have done well but ex­pe­ri­enced a huge rise and fall in 201415. The MSCI China A-Share On­shore in­dex is still well be­low its 2015 peak.

Most in­vestors would ar­guably be best served with lim­ited ex­po­sure to China through a broader emerg­ing mar­kets, Asia or global fund.

For those with a more bullish view there are a num­ber of spe­cial­ist funds and in­vest­ment trusts to con­sider.

US pres­i­dent Don­ald Trump and Xi Jin­ping, China’s pres­i­dent. Some see the “trade war” be­tween the two coun­tries as a short-term risk for in­vest­ing in Chi­nese com­pa­nies

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