The opportunities in China’s maturing markets
- Chinese financial markets are broadening, offering greater accessibility and liquidity for investors
- The new All China trust from abrdn will bring out key themes in the China economy, from a growing consumer to the energy transition
- It will also reflect abrdn’s proprietary environmental, social and governance analysis, with a higher rating and lower carbon profile than its benchmark
It is almost 20 years since China joined the World Trade Organisation. Since then, its growth has been a defining feature of the global economy. This has been reflected in its financial markets, which have improved their breadth and accessibility for international investors. Not only is this bringing new opportunities, it makes an increasingly compelling case for specialist China funds rather than incorporating China into a broader emerging markets portfolio.
This is the thinking behind combining Aberdeen Emerging Markets Investment Company and Aberdeen New Thai Investment Trust to form a new China equities investment trust. The new trust will draw on abrdn’s 30 years of experience of investing in China. It will be a concentrated portfolio of 30-60 holdings built around a number of key growth themes. It will also reflect abrdn’s proprietary environmental, social and governance (ESG) analysis, with a higher rating and lower carbon profile than its benchmark, the MSCI China All Shares index.
Chinese markets are increasingly broad and liquid. Across the A Share and other domestic markets, there are now around 5,000 companies, with around USD 10 trillion in market capitalisation. The Hong Kong-listed H Shares and US ADRs have a similar capitalisation. New companies are coming to market regularly, broadening the opportunity set for investors.
Previously, some of the Chinese markets had been inaccessible to international investors, which had held back liquidity. However, with the launch of initiatives such as the Stock Connect programme, which allows Chinese domestic investors to access the Hong Kong market and vice versa, accessibility and liquidity have improved across the Chinese markets. We see this as an important dynamic and a sign of maturity.
As it stands, the MSCI China index only includes 20% of the A Shares market cap. A Shares currently only make up 5% of the MSCI EM index. If A Shares were included at their full market capitalisation, it would prompt a wave of passive flows into the A Shares market. We are also seeing more investors carve out China as a stand-alone asset class, rather than including it in broader emerging market exposure. This is also pushing higher flows into the region.
However, there are certain sectors that are only represented in one or other of the Chinese markets. Chinese internet companies are, for the most part, only available via Hong Kong or other US-listed ADRs. Companies in the electric vehicle supply chain, in contrast, tend to only be available in the A Share market. For us, this is a strong argument for an ‘All China’ approach, investing across China’s various markets.
Within the new portfolio, the focus is firmly on the China of the future. As we see it, there are five key themes likely to define China from here. The first and, perhaps the most important, is the development of a domestic consumer economy. This has been an explicit goal of the Chinese government as it strives to move away from manufacturing-led growth. Wages have risen significantly in recent years and this has led to higher household wealth. Spending is accelerating among wealthier households: for those households in the USD $25,000-$30,000 bracket, spending has grown over 800%. As wealth grows across China, we see more aspirational spending on higher premium products.
This increasing wealth is having an impact elsewhere. It is leading to greater adoption of wealth management products, for example, another theme in the portfolio. It is also increasing demand for healthcare as an emerging middle class demands improved care, particularly in the wake of the pandemic.
The digitisation theme is every bit as strong in China as it is in the rest of the World, particularly in the wake of the pandemic. Widespread adoption of technology among China’s vast population is creating opportunities across multiple sectors, including e-commerce and gaming, plus digital transformation and data centres.
Investing in the energy transition is another fertile theme as China strives to meet its carbon neutrality ambitions. China is presently the world’s largest emitter of greenhouse gases, but is making significant progress in the development of ‘green’ solutions. As we see it, areas such as renewable energy, electric vehicles and new infrastructure should see significant growth.
These themes are replicated in other parts of the world, but the difference in China is the quantum of growth. 1bn people with greater spending power creates significant opportunities for companies. In spite of these higher growth levels, Chinese equities remain at a discount to their US equivalent. Chinese companies are delivering high quality earnings growth, against a strong economic backdrop and yet this is not fully appreciated by international investors.
At abrdn, we have been embedded in the China market for some time. We believe this experience is important: China brings a number of unique risks and, in particular, we believe it is important to invest through an ESG lens. We have built significant resources in both Hong Kong and Shanghai, plus proprietary ESG analysis.
We seek out companies with strong balance sheets, that can build and maintain high margins in competitive industries and have a proven track record. We want to find companies that are fully aware of risks and opportunities from ESG and will work with companies to help them improve their scores.
Our approach blends quantitative screening, our own proprietary database, being ‘on the ground’ meeting management teams and using our expert network. From a universe of 1,600, we have 190 stocks in the universe where we do intense due diligence. The result is a high conviction portfolio of 30 to 60 stocks that reflects the structural growth trends in the Chinese economy.
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.
- The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. If you are a basic rate tax payer and you do not anticipate any liability to Capital Gains Tax, you should consider if the advantages of an ISA investment justify the additional management cost/charges incurred.
- 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.