Feature – China
Silver lining So, is China irretrievable as an attractive investment option? There are also arguments that present China in a more positive way. A solid investment like China should not tank overnight. And some would argue that the essence of any good invest- ment strategy is that a crisis is an investment opportunity. In a typical, “don’t panic, Mr Mainwaring” manner, JP Morgan has identified three reasons why China remains a good invest- ment for institutional investors – if they remain invested for the long term. First, Chinese equities will deliver high-single digital returns over the next 10 to 15 years. Second, Chinese equities offer diversification through historically having a low correlation to other assets – something, JP Morgan believes continue.
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Third, onshore equities provide exposure to China’s increas- ingly consumer-led economy. It is worth noting that the bene- ficiaries of China’s economic transformation, which include consumer goods, technology, healthcare and high-end manu- facturing, presents investors with a good list of investment opportunities.
Layers of diversification
And despite extensive criticism, China bonds still appeal, according to Yii Hui Wong, a fixed income portfolio manager at Blackrock, who says that investors “benefit from two layers of diversification when investing in China bonds”. Firstly, renminbi-denominated credit has outperformed other key global asset classes during global market shocks. “It has proven to be a powerful tool to build resilience in a global port- folio,” Wong says. Secondly, the low correlation between onshore renminbi and offshore China US dollar credit market allows investors to reduce portfolio volatilities and generate alpha through asset allocation. In addition, China continues to offer attractive yields at a low duration.
And although these are testing times for China, Michael Bourke is optimistic. “Despite growing tensions on a geopolit- ical level, the fact remains that no other emerging market today can match China’s manufacturing scale, productivity or effi- ciency,” he says.
Alternative power Within the decoupling narrative, the beneficiaries of US efforts to reduce its reliance on China include India, Thailand, Viet- nam and Mexico. But there is a serious flaw in this outlook. Thailand and Vietnam lack the clout of China with lower rates of productivity based on a lower wage economy. “Opportunities in both countries will take time and committed investment to improve,” Bourke says.
48 | portfolio institutional | December-January 2023 | Issue 119
A point shared by Richard Bullock, Newton Investment Man- agement’s geopolitical research analyst, who argues that Viet- nam will never be in a position to eclipse China, with the most notable difference being scale. “Vietnam has less than a tenth of the population of China, and China attracts around $250bn (£210bn) in annual foreign direct investment,” he says. “So even if that were to fall by half – an extreme scenario – owing to geopolitical competition, Vietnam would only have the capacity to gain about a quarter of that.” Furthermore, the growth numbers in China are enough to make Western leaders salivate. According to the Organisation for Eco- nomic Co-operation and Development (OECD), economic growth in China will drop to 4.4% in 2022 – almost halving from the previous year’s 8.4% – and rebound to 4.9% in 2023. Although in some quarters these numbers have been further downgraded. But the important point is that they are still way ahead of the best forecasts developed countries can muster.
Solid supply In addition, and rather crucially, China remains firmly embed- ded in global supply chains – particularly in Asia and particu- larly in consumer goods and resources. These have been built up over decades and are not going to be replaced by other coun- tries any time soon.
This indicates that any drawback from the US and Europe is not going to be uniform. “Increased efforts to reduce exposure
Despite growing tensions on a geopolitical level, the fact remains that no other emerging market today can match China’s manufacturing scale,
productivity or efficiency. Michael Bourke, M&G
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