Why China is about to be­come a larger part of your port­fo­lio

The Daily Telegraph - Your Money - - FRONT PAGE -

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

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.