The most recent earnings and sales growth figures from the Chinese corporate sector reveals a broad-based recovery and rebalancing. This recovery began as part of an infrastructure government spending programme last year, but has broadened out across the economy now, reinforced by a synchronised global recovery and a pick-up in exports as well.
Figure 1: Chinese corporate growth and earnings recovering
At the same time, valuations look inexpensive relative to global equities, despite the MSCI All-China Index gaining 6% so far this year. The 12-month forward P/E for the stocks in our portfolio trade at about 11-12x, while global stocks are trading closer to 17-18x, representing a substantial discount.
Nevertheless, China remains significantly underweight in emerging market equity portfolios. We’re seeing a rise in fund flows, but have some way to go yet. When A-shares are included in the MSCI indices, it could be a catalyst for the asset class over the longer term.
Figure 2: China weight in GEM funds near record low
The structure of the Chinese market is fairly complex and we’ll leave it for another day to go into those details. Suffice it to say that we believe a truly holistic, ‘All-China’ approach provides the broadest opportunity set and maximises exposure to the best investment ideas.
Indeed many China equity index and active funds use the MSCI China index, comprised currently of around 151 stocks. Compare that with our comparative index, currently comprised of 964 stocks. But we don’t limit our All-China strategy to just the index: our potential universe includes 2892 A shares and 101 B shares in China. Adopting the All China approach thus can offer the potential for a much broader and more diversified portfolio.
The All-China approach also offers the opportunity to take advantage of price discrepancies between different lines of stocks. While this advantage will eventually be arbitraged away as Chinese stock markets liberalise, for the moment, only an All-China active management approach offers the chance to exploit this inefficiency.
Figure 4: Opportunity - A/H dual listing
We believe we have proven the applicability and effectiveness of our 4Factor™ process within the All-China investment universe. We have a strong track record of performance in this area, built by two experience managers, supported by the wider 4Factor team with an average of 17 years’ experience. The combination of our proven process and alpha added by the team has generate an impressive track record since launching in 2014.
Figure 5: Annualised (Gross) performance in USD
If you have any questions or would like more information on the topic please contact us.
Figure 1: Old Economy = Following subsectors: Old Consumer Discretionary (Auto, Household Durables, Specialty Retail, Textiles, Apparel & Luxury Goods), Old Consumer Staples (Beverages, Food & Staples Retailing, Food Products), Energy, Old Industrials (Capital Goods, Transportation), Materials, Real Estate, Telecommunication Services, Old Utilities (IPPs); New Economy = Following subsectors: New Consumer Discretionary (Diversified Consumer Services, Internet and Catalogue Retail, Media), New Consumer Staples (Personal and Household Products), Healthcare, New Industrials (Aerospace & Defence, Commercial & Professional Services), Information Technology (Software & Internet, Semiconductors, Technology Hardware), New Utilities (Gas Utilities, Renewable Electricity, Water Utilities) Time period shown covers the period for which we have reliable data. For further information on investment process, please see the Important Information section.
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