Looking back at 2020, China was in the news for all the wrong reasons not least its economic volatility due to the pandemic. 2021 understandably looks to be far more positive and upbeat. China and its economy seems to be thriving and the long-term prospects of the country’s vast, diverse equity markets are moving towards sustainable, quality growth, which make a very attractive proposition for active investors. GDP and export growth places China in stark contrast with most Western economies, most of whom are still struggling to recover at anywhere near the same pace. It therefore poses a pivotal question of whether this marks a return to China’s seemingly unstoppable rise to the world economic dominance?
Realising the potential
Our highly experienced China equity team has a long-established presence in the region and benefit from ‘on the ground’ insights to inform its investment strategy. They see untapped opportunity in China’s equities, building on the government’s sustainable growth strategy and powerful domestic trends such as urbanisation and a booming middle class, that continues to drive China’s GDP growth and productivity.
The country’s two equity markets are, like many things associated with China, surprisingly vast and as a result, at a scale that challenges their otherwise dominant US equivalents. The Greater China onshore (A-share) and offshore (H-share) equity markets have a combined market capilisation of over USD 14 trillion. Its onshore market alone has USD 10.5 trillion of listed market capitalisation with around 3,800 stocks, making it one of the world’s largest after the New York Stock Exchange and Nasdaq.
These two equity markets are complementary with exposure to both large state-owned and domestically driven private companies, operating across a wide array of sectors. Investing in both China’s A and H-shares provides investors opportunity for diversification, liquidity, low correlation to global equities and economic trends and the ability to tap into the huge variety and flexibility that the Chinese economy offers.
Underrepresented and undervalued
The Chinese have found themselves with a reputation for being more economical with sharing information than their western counterparts. The same is relatively true for Chinese stocks and company information. There has been a notable lack of reporting on Chinese stocks, and domestic broker coverage in A-shares tends to be weak and sporadic. But China’s policymakers are increasingly recognising this as a barrier to investor confidence, especially around ESG topics, so are now making concerted efforts to address these concerns, as they seek to attract more foreign investment.
In addition to that, the inclusion of more China onshore companies in the mainstream MSCI, FTSE, S&P indices has broadened the acceptance of Chinese equities in wider international portfolios, further giving them much needed credibility and transparency.
To take advantage of this, BNPP Asset Management are equipped with locally based research and investment teams to unearth the detailed market understanding that provides the invaluable long-term investment horizon and identify where they is low market efficiency, discounted valuations and mis-pricing opportunities. Our Greater China Equities team members are permanently based in Shanghai and Hong Kong and have a dedicated China economist. Alongside them they have 3 of our 25-strong Sustainability Centre team based in Hong Kong to support ESG integration into our overall Chinese equity capability.
Investigating the opportunities
One the world’s largest markets and potentially the world’s largest economies and politically influential powerhouse is in a fascinating and interesting stage of its long and colourful development. We have to take into account, before we invest, the many factors that can influence the value and potential of the companies that make up its diverse equity market. Investigating the affects potential deglobalisation will have, the intervention from government on everything from consumerism, inward investment, environmental credentials and global trade alliances.
We believe there is a significant investment opportunity in Chinese equities, driven by the changing nature of China’s economy, prompting the emergence of globally recognised Chinese companies in almost every sector and the increasing potential and reputation of its stock market.
Our China Equities portfolio is a high-conviction concentrated portfolio holding between 40 to 60 stocks, with assets totalling around USD 3.0 billion and with full ESG integration, run by an award-winning team. The portfolio strategy focusses on three key investment themes:
The first is technology and innovation which includes industrial automation which has been benefitting from higher R&D spending and a vast talent pool, new and emerging technology such as China’s huge electric vehicle production capacity.
Consumption upgrading is the second theme. There is also opportunity through China’s vast domestic consumption across areas such as education, healthcare, insurance, travel and premium consumer brands all of which are in increasing demand.
And alongside both of these, sits industrial consolidation particularly in the construction, machinery, mining and chemical sectors which have all been driven by regulatory tightening, environmental pressures, higher financing costs, as well as structural and consumption upgrading.
To find out more about our products and strategies please contact us using the form below or visit your local website via bnpparibas-am.com
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Chinese equities are among the world’s largest markets, comprising both onshore and offshore companies. They represent over USD 10 trillion in market capitalisation and look set to benefit from key structural trends such as China’s transition to a service- and consumption-led economy.
To find out more about our China capability or any of the investment themes featured, please contact us or visit your local country site via bnpparibas-am.com.
Target companies across the water value chain that are benefiting from the impact of tightening global water and water-related regulations.
Access China’s growth potential while maintaining low correlation to other global equities.
Participate in the long-term consumer, societal and demographic trends that drive economic growth today.
Access growth opportunities across the technology sector including cloud computing, artificial intelligence, the Internet of Things (IOT) and more.
Take advantage of health care innovation including genetic sequencing, drug delivery, miniaturization, bio-compatible materials, haptics and more.
Capitalise on companies that are helping to transition the food and agriculture sector towards more sustainable production and consumption practices.
GET IN TOUCH
To find out more about the investment themes discussed here, please complete the form below.