Page 6 - DIY Investor Magazine | Issue 31

THE OPPORTUNITIES IN CHINA’S MATURING MARKETS By Nicholas Yeo, Investment Manager, China Investment Company Limited • Chinese financial markets are broadening, offering greater accessibility and liquidity for investors • abrdn China Investment Company Limited brings out key themes in the China economy, from a growing consumer to the energy transition • It also reflects abrdn’s proprietary environmental, social and governance (ESG) analysis, with a higher rating and lower carbon profile than its benchmark It is almost 20 years since China joined the World Trade Organisation. Since then, its growth has been a defining feature of the global economy. This has been reflected in its financial markets, which have improved their breadth and accessibility for international investors. Not only is this bringing new opportunities, it makes an increasingly compelling case for specialist China funds rather than incorporating China into a broader emerging markets portfolio. This was the thinking behind combining Aberdeen Emerging Markets Investment Company and Aberdeen New Thai Investment Trust to form a new China equities investment trust. The new trust draws on abrdn’s 30 years of experience of investing in China. It is a concentrated portfolio of 30-60 holdings built around a number of key growth themes. It also reflects abrdn’s proprietary environmental, social and governance (ESG) analysis, with a higher rating and lower carbon profile than its benchmark, the MSCI China All Shares index. ‘THIS IS A STRONG ARGUMENT FOR AN ‘ALL CHINA’ APPROACH, INVESTING ACROSS CHINA’S VARIOUS MARKETS’ DIVERSIFYING MARKETS Chinese markets are increasingly broad and liquid. Across the A Share and other domestic markets, there are now around 5,000 companies, with around USD 10 trillion in market capitalisation. The Hong Kong-listed H Shares and US ADRs have a similar capitalisation. New companies are coming to market regularly, broadening the opportunity set for investors. Previously, some of the Chinese markets had been inaccessible to international investors, which had held back liquidity. However, with the launch of initiatives such as the Stock Connect programme, which allows Chinese domestic investors to access the Hong Kong market and vice versa, accessibility and liquidity have improved across the Chinese markets. We see this as an important dynamic and a sign of maturity. As it stands, the MSCI China index only includes 20% of the A Shares market cap. A Shares currently only make up 5% of the MSCI EM index. If A Shares were included at their full market capitalisation, it would prompt a wave of passive flows into the A Shares market. We are also seeing more investors carve out China as a stand-alone asset class, rather than including it in broader emerging market exposure. This is also pushing higher flows into the region. However, there are certain sectors that are only represented in one or other of the Chinese markets. Chinese internet companies are, for the most part, only available via Hong Kong or other US-listed ADRs. Companies in the electric vehicle supply chain, in contrast, tend to only be available in the A Share market. For us, this is a strong argument for an ‘All China’ approach, investing across China’s various markets. DIY Investor Magazine · Nov 2021 6