China: too big to pass05 December 2019
More and more fund managers are now singing the same song when it comes to the growing investment opportunity in China. But most aren’t able to reach the high notes.
When it comes to China, the majority of fund managers are focusing on multinational companies that have shown success in penetrating the Chinese market. However, the real opportunities lie where most investment managers can’t access: in China’s domestic A-shares listed on Shenzhen and Shanghai exchanges.
The risk is in missing out
China alone accounts for 39% of global growth and its share of economic activity is rising as the nation’s population of around 1.5 billion people gains wealth and consumes ever more. China will inevitably overtake the US as the world’s largest economy,
Following its rapid economic growth has been the expansion in the Chinese share market. Combined, the mainland China exchanges in Shanghai and Shenzhen now forms the second largest share market in the world after the US.
There are a number of important factors to consider when choosing your China equity investment strategy.
China’s economic growth is largely being driven by:
- Rapid urbanisation and growth of the middle class;
- Rising income in this flourishing new middle class;
- The largest millennial generation population in the world;
- A burgeoning domestic technology sector; and
- Rising living standards for all Chinese.
Accessing China A-shares
This opportunity is not easy to access. Investing in some China A-shares is no simple feat and only a handful of Australian institutional investors, including VanEck, have a Renminbi Qualified Foreign Institutional Investor (RQFII) license enabling us to invest directly in all A-shares.
The VanEck Vectors China New Economy ETF (ASX: CNEW) is an Australian first, utilising a state-of-the-art smart beta strategy - the CSI MarketGrader China New Economy Index (CNEW Index) - giving investors easy access to China A-shares and the enormous potential growth opportunities in China’s New Economy sectors.
The CNEW Index includes 120 companies selected from a universe of approximately 2,900 China A-shares and focuses on securities from each of the four ‘New Economy’ sectors:
- Consumer discretionary; and
- Consumer staples.
Only VanEck offers specific China A-share ETFs so that investors can participate in what may be the next growth phase for domestic China investments, beyond limited opportunities in H-shares, Red-chips and NYSE listed ADRs.
What the smart money is saying
Earlier this year, American hedge fund investor and Bridgewater founder, Ray Dalio, said China is no more risky than the US or European markets, “What is risky,” he said “is not to have an investment in China”.Platinum’s Andrew Clifford said of China, “there was no other country in the world that offered the same potential for growth driven by a huge consumer market and a flexible economy and growing infrastructure”.
This rhetoric is not unique, fund managers including Zurich, Fidelity, UBS and Mobius have all expressed similar sentiments. At The Australian's recent Strategic Forum, Magellan’s Hamish Douglass joined this chorus of global fund managers stating, “To pass on investing in China is risky from an investment point of view. You will miss out on one of the biggest investment areas.”
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An investment in the Fund is subject to various risks that may have the effect of reducing the value of the Fund, resulting in a loss of capital invested and a lack of income from the Fund. Chinese securities have heightened risks compared to investing in the Australian market. These risks include currency risks from foreign exchange fluctuations, ASX trading time differences, foreign laws and regulations including taxation, potential difficulties in enforcing contractual obligations, changes in government policy, expropriation, economic conditions including international trade barriers, restrictions on foreign ownership, securities trading restrictions, restrictions on repatriation and restrictions on currency conversion. No member of the VanEck group guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from the Fund.
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