New research by NTree International suggests significant positive sentiment towards Chinese equities, and investment experts have argued that pension schemes should make strategic allocations to mainland Chinese markets.
NTree carried out a study on behalf of the state-owned China Post Global, which found that 75 per cent of the 150 professional investors polled anticipated foreign investment in Chinese equities to increase in the first quarter of 2021 relative to its fourth-quarter 2020 level.
Investors were split on the current valuation of Chinese equities, however, with 41 per cent believing it to be fair, while 48 per cent felt Chinese stocks were slightly overvalued. Only 9 per cent thought they were undervalued.
It’s important that pension schemes are aware of the risks because their global portfolios are already experiencing a shift to China
Shuntao Li, Barnett Waddingham
Positive returns from Chinese bonds, at a time when many other bond markets worldwide were seeing negative yields, was a factor that 42 per cent of those polled said incentivised investment in Chinese asset classes generally.
Timothy Harvey, NTree chief executive, said: “Our research shows the positive sentiment towards Chinese equities this year, which is being driven by favourable conditions in the market and the fact that China has sustained relatively normal economic and fiscal policies during the global coronavirus pandemic.”
Danny Dolan, director at Market Access, added: “Chinese equities have performed extremely well during the pandemic, demonstrating again China’s low correlation to other major markets. China’s equity market has risen 30 per cent over the past 12 months and continues to attract investment from overseas institutional investors.”
Strategic long-term investment opportunities for pension schemes
David Walker, chief investment officer at Hymans Robertson, told Pensions Expert that an allocation to emerging market equities is “attractive” for UK pension schemes looking long term.
“Emerging markets, led by China, have demonstrated that they are an important engine of incremental global economic growth,” he said.
“The emerging market economies of the 1980s and 1990s were focused on producing cheaply and selling abroad. Over time, these economies — and China in particular — have evolved to focus more on growing internal consumption and leapfrogging the traditional path to becoming developed markets through the use of mature economic policies and technology.”
Long-term trends like urbanisation and the growth of incomes, as well as technological innovation and emerging tech-led industries, “make the investment proposition more attractive than in the past”, Walker continued.
“Emerging markets as a group have been filing more global patents than the US and Japan since 2005. China alone is home to many companies with global leadership in renewable energy production, 5G cellular network equipment and electric vehicles — technologies that are expected to form the bedrock of future societies.”
However, he recognised that, despite their strong growth prospects, “most companies in this region lag behind their developed market counterparts in environmental, social and governance practices”.
Mercer principal Gareth Anderson told Pensions Expert that China’s “increasingly consumption-led economy is significantly underrepresented” in global indices and many investors’ equity portfolios as well.
“While headline exposure to China in indices may appear high, it is heavily tilted towards China’s offshore equity market — Hong Kong-listed stocks — for historical reasons,” he explained.
“The future dynamics of China’s economy are likely to be increasingly reflected in the China onshore equity market, often referred to as China A-shares. Consequently, for investors to get full and balanced exposure to China’s full opportunity set, both onshore and offshore markets need to be represented in equity portfolios.”
Strong economic growth ought only to be seen as “the icing on the cake” when considering Chinese investments, Anderson continued.
“The real attraction of the China onshore market stems from the enhancements a standalone allocation can make to an overall equity portfolio, due to its low correlation with other equity markets and the abundance of alpha opportunities.”
Mercer advocates a “meaningful strategic allocation to the China onshore market” representing “5 per cent to 10 per cent of an overall equity portfolio”, he said, though he seconded Walker in pointing out the “specific ESG and geopolitical risks” involved.
Investing in China ‘attractive but also risky’
Though there are many reasons to be positive about China from an investment perspective, Shuntao Li, senior research analyst at Barnett Waddingham, cautioned that attractive propositions carry their fair share of risk.
“It’s important that pension schemes are aware of the risks because their global portfolios are already experiencing a shift to China,” she said.
“If we leave the stock market volatility to one side, the main risks that are specific to China are ESG risk and manager selection risk. Within ESG risk, the key is to pay attention to risks that have a direct impact on investment returns.”
Governance risk “is the main one to be concerned about”, Li continued.
“It manifests both in political risk of government intervention, as well as management quality at company level. As an example, almost 40 per cent of the Chinese stock market [is comprised of] state-owned enterprises.”
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Though the vast majority of schemes will already have exposure to China in one form or another, Li said that “we are not recommending a specific Chinese allocation to every pension scheme, [though] it is being considered for our higher-governance investors”.
“Our preferred approach is to make a standalone allocation with an actively managed fund,” she added.
