THE AGENDA Wealth
21
Annamaria Koerling
China and its economy are facing strong, new headwinds. How should sinophilic investors respond?
eyebrows, and the country’s 11th-hour insistence on phasing down but not phasing out coal reinforced perceptions that it is not pulling its weight in the global race to net zero. Also, Morgan Stanley has highlighted that hidden debt on China’s belt and road plan tops $385 billion, and Beijing’s zero-Covid policy of self-isolation seems to be seriously damaging international business. Should investors be re-evaluating their asset allocation decisions in the light of all this? Opinions are polarised. Some are scaling back or even withdrawing completely, refl ecting that poor corporate governance, unfavourable demographics, structural changes in the engines of growth and likely further protectionist strategies will not work out well. The popular wisdom that it is nigh-on impossible to square investing in China with ESG concerns is also a factor. Of all the perceived headwinds, the
A
ll eyes have been on China recently. The world’s second biggest economy is grappling with a property sector downturn, high commodity prices and energy shortages. President Xi’s no-show at COP26 raised
China’s eff orts
structural changes are causing greatest concern. The new mantra of the Chinese government is ‘common prosperity’, and the focus is on rebalancing sources of growth from external to internal in order to facilitate ‘redistribution’. The desire to control the ‘oil of the 21st century’ – ie data – has caused alarm among investors as it has triggered tighter regulation of technology and tutoring companies, as well as a reduction in the leverage used by real estate developers. The withdrawal from China of LinkedIn in October and Yahoo in November coincided with the implementation of China’s new data protection law. There are those who take another view, however. Steadfastly sinophilic investors argue that these headwinds are likely to be transitory, and that new policies will ultimately create greater stability for future growth. China’s efforts to restructure its credit markets and crack down on monopolistic practices can be framed as positive moves that could lead to more productive companies. China and ESG investing are also not necessarily incompatible. Research by the BlackRock Institute published last May pointed to the fact that China stands to benefi t most from the green transition as its stock market has a greater sectoral bias to energy-intensive industries. It argued that there was no reason to assume China was not committed to its goal of net zero by 2060. After all, China already spends 1.2 per cent of GDP on environmental measures.
to restructure its credit markets and crack down on monopolistic practices can be framed as positive moves
Only time will tell whether the strong underperformance in 2021 and the lower valuations will prove to have been a favourable entry point. It is often diffi cult to separate the politics from the markets. China already makes up more than 15 per cent of global economic growth. Economically, the Communist Party’s ambition is to double GDP by 2035, to surpass the US and permanently shift the centre of gravity for growth to Asia. There is an argument that a movement towards de-globalisation reinforces the need to own more Chinese assets – especially as, globally speaking, investors have very little in China. Another BlackRock survey indicated that Chinese assets represent 0.3 per cent of equity allocation for institutional investors in the US, while consulting fi rm Willis Towers Watson reported in 2020 that the average institutional allocation to China was 5 per cent in more growth-orientated portfolios – a fi gure that coincides with the weight of China in the MSCI All Countries Index of 5 per cent. But, as Jeremy Murden of Matthews Asia points out, Chinese equities make up over 15 per cent of the global equity opportunity set. For private investors, building up
exposure to China is not without its risks. It is probably best viewed as a journey, during which the pace of market improvements and the level of market access should be carefully monitored. After all, historical data remains limited, transparency can be a challenge, and there are still barriers to entry and exit for foreign investors. Some advisers argue that Chinese stock-
picking capabilities are largely absent in many Western investment fi rms. This seems to be confi rmed by the range of outcomes. Morningstar data indicates an average 11 per cent per annum performance differential between the top and bottom quartile actively managed funds investing in China over the past three years. As is so often the case, those of us looking to the future may do well to look at the past. In 1916, US economic output overtook that of the British empire. This heralded the dawn of the American century, and consigned investors who had not diversifi ed away from the old-world order to decades of disappointing returns. More than 100 years later, the world may be on the cusp of an economic shift of similar signifi cance – if you believe asset management giant Pimco, we are entering ‘the age of transformation’. Perhaps it’s time for investors to transform their portfolios too. S Annamaria Koerling is managing partner of Delfin Private Office
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