Your portfolio is becoming more Chinese
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