Allocations to Chinese equity and fixed income should stand alone rather than be part of global or emerging market strategies for investors looking for diversification and potential excess returns from the vast opportunity set that Chinese financial assets represent.
In our new white paper, we argue that a standalone allocation would do justice to China’s growing weight in major global market indices and its maturing financial markets. We believe a strong regulatory landscape and rising international participation enhance the institutionalisation of a market.
With Chinese assets historically showing a low correlation with developed markets and other emerging markets, simply increasing one’s exposure to China via a higher allocation to emerging markets is suboptimal.
Investors would miss out on alpha opportunities from the large dispersion in performance between Chinese equity sectors and individual stocks and from new companies listing.
While the Chinese stock market has grown to represent the largest share of the MSCI Emerging Markets index, fixed income still accounts for a small percentage of major bond indices. The percentage is growing, however, making investing in the country’s bonds part of the global opportunity set for investors, not just an emerging markets opportunity.
The appeal to foreign investors of the Chinese bond market is relatively high yields, a stable currency, and low correlations with other local currency emerging market debt. In addition, there is often a negative correlation with the domestic A-share market.
China’s bond market is the second largest in the world, but most emerging market debt investors have at most a negligible allocation in their portfolios. We believe this market offers the potential to obtain above-average, risk-adjusted returns, especially for those who have the skills and experience to analyse it.
FOR A DETAILED ANALYSIS OF THE OPPORTUNITIES, READ A STANDALONE ALLOCATION TO CHINA
