5 reasons to focus on China’s A-shares

Insights, Perspectives 2021
14.10.2021 Reading time: 3 minute(s)
image

Human thinking often focuses on noisy news rather than on well-known long-term major trends. Investment decisions are no different. This psychological phenomena is referred to as the “recency bias” and was described by the Nobel Prize winner Daniel Kahneman in his bestselling book “Thinking fast and slow”. If you keep that in mind, volatility caused by such short-term market reactions can create opportunities to enter long-term investment opportunities at a depressed stage.

China is one of the areas where a strong long-term investment case exists and news about recent events, such as trading tensions with the US and new regulations, have been dominating the media’s and investors’ attention. However, there are five key reasons to consider China a land rich in compelling investment opportunities:

  

  • 1. China (on the rise) as an economic superpower and the world’s growth engine

    The World Bank described the pace of growth in China as the fastest sustained expansion by a major economy in history: China is the world’s 2nd largest economy and with its population of 1.4 billion people, China represents about 18 percent of humanity. Since China began to open-up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 800 million people have been lifted out of poverty. Even after a recent slowdown, China’s economy is growing 6–7% a year, which remains high by the standards of most middle-income economies. That`s about 2x the growth of other large economies. As a result, China is expected to contribute more than 20% of the world’s economic growth over the next five-year period, according to an IMF forecast.

    (As an interesting aside, China was already the world's largest economy in 1820, accounting for an estimated 32.9% of global GDP, according to a study by economist Angus Maddison. Foreign and civil wars, internal strife, ineffective governments, natural disasters (some of which were man-made), and distortive economic policies caused China's share of global GDP on a purchasing power parity (PPP) basis to shrink significantly.)

    Sources:
    https://sgp.fas.org/crs/row/RL33534.pdf
    https://www.worldbank.org/en/country/china/overview

  • 2. From a manufacturing champion to an innovative leader

    Since opening up in 1978, China has become the world’s largest international trader of manufacturing goods and the second-largest trader in services (Source: WIPO), and consequently also the world champion in exports. Economic reforms and trade and investment liberalization have helped transform China into a major trading power.

    China’s exports soared by 17% annually in the past two decades in dollar terms. In total, Chinese merchandise exports rose from USD14 billion in 1979 to USD2.59 trillion in 2018. That’s an increase by a factor of 185. Merchandise imports grew from USD18 billion to USD2.1 trillion (x116.6). The value of China's manufacturing on a gross value-added basis was 49.2 percent higher than the U.S. level in 2016.

    https://www.everycrsreport.com/reports/RL33534.html#_Toc12530868


    But the story continues, China’s next transformation is well under way. Services have already taken over manufacturing as the largest share of GDP and are now the largest contributor to GDP growth. In addition, China has managed to reinvent its economic profile from a manufacturer to an innovative leader with a strong focus on new technologies. China and its corporates are among the leaders in future industries like e-commerce, artificial intelligence, fintech, high-speed trains, renewable energy, electric cars, 5G, Blockchain, and solar energy. As a result, China was also the biggest source of applications for international patents in the world in 2020 for the second consecutive year after leaving the U.S. behind in 2019 and extended its lead in 2020. China filed 68,720 applications while the U.S. filed 59,230. The rate of increase was higher for China with a 16.1% year-on-year increase versus 3% for the U.S. China first knocked the U.S. from the top spot in 2019. China’s R&D spending in total accounts for around 20 percent of the world’s total. Therefore, investing in China provides access to the leaders in technologies shaping the world of tomorrow.

    (Source: https://www.cnbc.com/2019/11/22/china-drive-to-be-world-tech-leader-could-accelerate-as-its-economy-slows.html)


    (How was that possible? Several factors are supporting this trend: With its 1.4 billion citizens, China has a huge domestic market that provides technology innovators plenty of room to grow to a critical size. China’s government has a strong willingness to support its growth engines and has the authority to shape industrial policy and provide infrastructure to achieve this. In addition, global projects like the belt and road initiative have opened many doors to gain market share in Asia and EMEA. In our view, these are very positive conditions to allow innovative business leaders to emerge and grow.)


    https://www.reuters.com/article/us-un-patents-idUSKCN2AU0TM

    https://www.cigionline.org/articles/what-do-chinas-high-patent-numbers-really-mean/#:~:text=China%20has%20led%20the%20world,total%20patent%20applications%20that%20year.

  • 3. Two legs of continued growth: The “dual” circulation

    Since opening the economy for foreign trade in 1978, China has been very successful in boosting its exports as the main catalyst for its growth. This was a great success story, but it also has exposed China to the vulnerabilities inherent in international trade integration. Therefore, China's dual circulation strategy places now a greater focus on the domestic market, or internal circulation, in order to be less dependent on an increasingly less supportive world economy and foreign policies of other countries. As a main engine of this strategy, China has just entered its 14th Five Year Plan of targeted investments to support its domestic growth, aiming at increasing consumption to support China’s economic development.

    The dual circulation strategy reflects China`s long-standing ambition to become more self-sufficient and involves developing its huge domestic market of 1.4 billion consumers as a main driver of growth, steadily increasing the share of the population belonging to the middle class with sufficient wealth to increase consumption. Since 2006, China managed to add an average of 60 million people to its middle class every year. To illustrate the magnitude of this growth, it is roughly the same as the number of people living in Italy. In relative terms, China is experiencing the fastest expansion of the middle class the world has ever seen. According to recent projections, about 1.2 billion Chinese people will be in the middle class by 2027, making up one quarter of the world total. This might further increase investor`s confidence in China`s economic strength and its ability to continue the growth story with a new catalyst.

    https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20still%20the%20worlds%20growth%20engine%20after%20covid%2019/mckinsey%20china%20consumer%20report%202021.pdf

  • 4. Increasing demand for Chinese stocks around the corner

    For equity investors, another relevant factor for an investment decision is valuation and other indicators about future supply and demand of the respective stocks. In this regard, there are several promising facts investors should know:

    In 2020, China’s share of global GDP was about 18%, while its share of global equity capitalization was only about 12%, even before the drop in 2021. Considering China’s significant growth, this doesn’t suggest that China’s equity market is overly expensive. In addition, equities appear under-owned by Chinese households (8%) vs. equity ownership in developed economies (US 25 percent). And China is currently also under-owned by foreign investors, as they hold just 3% of the broad market in China.

    Further demand might come from investment strategies guided by market indices: The MSCI inclusion factor for Chinese equities should grow from the current 20 to 100 percent in 2026*. This alone could lead to inflows of up to USD 240 billion as a significant source of demand in equities. If you take these factors altogether, the perspectives for increasing demand in Chinese equities seem to be quite promising.

  • 5. China A-Share exposure can lower risk

    Many investors still perceive Chinese A-share stocks as a rather risky part of their overall portfolio. But as a building block of a well-diversified portfolio, they can even reduce the overall risk. This is because China’s A-Shares have a low correlation with international stock markets and high-return dispersion, which makes the asset class attractive to diversify the portfolio without diluting the average returns. In addition, the China A universe of stocks is a broad segment covering many industries and individual firms, hence offering broader diversification at an industry sector level than can be gained via the stocks listed in Hong Kong. It even offers access to unique sectors.

  

China on a rollercoaster

In 2021, Chinese equities have been fairly volatile due to a series of recent market events which caught investors by surprise. It feels a bit like being on a rollercoaster at times. While it is always a good idea to keep an eye on the long-term impact of such events, the underlying opportunity for China is still intact.

China is an economic giant with rising consumption, a leading manufacturer, has a growing reach across the globe, and hosts many innovative leaders in new technologies. In addition, Chinese equities are under-owned both by domestic and foreign shareholders. In hindsight, phases of market volatility often turn out to be a time to enter such opportunities at a discount. Remember, the time to step onto a roller coaster is when the train is on the ground, just after it has taken a steep drop from on high.

  

«The China A market is broad and deep and therefore offers countless
opportunities for stock pickers. With our rule-based approach, we aim to systematically identify these opportunities.»

Roger Merz
Head of mtx Portfolio Management

 

  

Wealth Management – actively managing your assets

You entrust us with the management of your assets, benefiting from our extensive investment expertise.

Learn more

Vontobel Volt® – your app solution for thematic investing

Select up to 14 megatrends according to your convictions – risk-monitored and actively managed by our experts.

To Vontobel Volt®

 

  

derinet – guiding you through the world of structured products

derinet will help you find your way through the world of structured products. Take a look at our comprehensive product range.

Learn more

 

  

Let our experts advise you without any obligation.

After sending the form you will receive an email asking you to confirm your email address.

 

  • Legal notice

    The data transmitted to Vontobel using this form are sent encrypted via the Internet. However, the possibility of unauthorized third parties accessing the transmitted data, particularly using malware on the computer, cannot fully be excluded. If you are using this form to send confidential data (e.g. your account number), you accept the risk of disclosure of your banking relationship and bank account information to third parties and you release Vontobel from any and all liability for damages incurred as a result of the use of this form, to the extent that such release is permitted by the law.

    By providing your phone number and/or email address, you declare your express consent to Vontobel contacting you by phone and/or unsecured email. The personal data provided by you are used and stored to handle and process your inquiry and in order for us to perform our contractual duties in connection with the services chosen by you. The personal data may be processed on behalf of Vontobel by a subcontractor engaged by Vontobel, including outside your own or Vontobel’s location. Your personal data are processed and stored for the duration of our business relationship. In addition, we are subject to a number of duties to retain and document. Finally, the duration of storage is also determined by the statutory limitation periods.

    Please note that the use of email and electronic means of communication involves significant risks, such as lack of confidentiality, possible manipulation of contents or sender, dispatch to the wrong recipient, viruses, etc. Vontobel does not accept any responsibility for damages in connection with the use of emails and electronic means of communication. Vontobel therefore also recommends that you do not send sensitive information by email, that received text is not included in responses and that the email address is newly entered manually each time.

    Vontobel does not accept orders for commercial transactions such as the opening of accounts, payment or stock market orders, cancellations of orders or authorizations, blocking of credit cards, changes of address etc. via this form. Please contact your branch or your relationship manager with regard to such transactions.

    Not all products are available in all countries.



    Bank Vontobel AG
    General Counsel
    Gotthardstrasse 43
    CH-8022 Zürich

    Terms and Conditions of Use
    Privacy Policy

 

*

Mandatory information

Legal notice
This publication was created by Bank Vontobel AG, Zurich (Vontobel). The document is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. This publication is marketing material, is provided for information purposes only, and does not take into account individual needs, investment targets, or financial circumstances. The publication does not constitute an offer, a solicitation, or a recommendation to use the Vontobel service described in it, to purchase or sell securities or other financial instruments, or to take part in an investment strategy. Capital expenditures in financial products and markets pose various risks (e.g. market, currency, or liquidity risks). Before making an investment decision, investors should obtain personal advice from their financial and tax advisor concerning the risks associated with the investment and their personal situation. The content, scope, and prices of the services and products described in this publication are governed exclusively by the agreement concluded with the individual investor.

The information and/or documents offered on this website represent marketing material pursuant to Art. 68 of the Swiss FinSA and are provided for information purposes only. On request, further documents such as the basic information sheet or the prospectus are available free of charge whenever you wish. The products, services, information, and/or documents offered on this website may not be accessible to individuals domiciled in certain countries. Please note the applicable sales restrictions of the respective products or services.

© Vontobel Holding AG 2021. All rights reserved.

  

  

  

 

Stay up to date with our newsletter “Impact on Investors”

After submitting you will receive an email with a confirmation link.

 

*

Mandatory information