Marcos Silva
By Conrad Saldanha, CFA
China’s policy outlook may create attractive opportunities for both equity and fixed-income investors.
As China’s leaders look to wrap up the 20th Communist Party Congress this weekend, we thought it a good time to reflect on what the world’s second-largest economy could portend for investors.
While China’s sheer size and growth potential make it too big to ignore, many investors have myopically shed Hong Kong and ADR-listed shares.
I recently discussed various aspects of China’s starring role on the global stage with my colleagues Peter Ru, China Fixed Income; Meng Ning, Emerging Market Equities; and Charles Nguyen, Managing Director, Public Equities ESG Investing.
The Macroeconomic Picture
Looser monetary policy and stimulus initiatives have helped China chart a solid post-COVID-19 recovery with modest inflation. Going forward, we believe the containment of COVID, a mix of technological innovation, and a focus on social equality will continue to drive broad economic growth.
On Fixed Income
“We believe China’s focus on ‘higher-quality’, sustainable economic growth will make the market more attractive in the long run,” says Ru. “We also believe China’s interest rate is on a long-term downtrend, which could create attractive opportunities for fixed-income investors.”
On China A-Shares
Despite China’s efforts to make access to onshore markets more efficient, most global investors are underexposed: Though the Chinese economy represents approximately 18% of global GDP1, the China A-share market only comprises 1% of the global MSCI ACWI index2. Over time we expect China’s weight in global portfolios to expand as the country’s financial markets continue to develop. “While A-shares have declined, we believe valuations are attractive and they are poised for a rebound as Chinese growth recovers,” says Ning. Efforts in seeking to achieve carbon neutrality and energy reform have the potential to create additional investment opportunities given China’s leading position in wind and solar components and materials.
On the Climate Transition
“China is a global leader in the renewable power industry and has established clear policy commitment in support of climate transition and the protection of natural capital,” says Nguyen. “Significant growth potential in the Chinese green bond market is encouraging, too.”
On Portfolio Allocation
Overall, we believe China’s massive economic influence (it’s expected to contribute about 30% of the world’s growth next year), ongoing capital-market reforms, and lower correlation to other developed markets offer attractive opportunities for global investors to diversify their portfolios.
1World Bank, as of December 31, 2021
2 MSCI, as of December 31, 2020
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