History has shown that GDP growth rates have little correlation to stock market performance over the longer term and we believe market dynamics are moving in a positive direction for stock market investing.
The depth of the Chinese equity market means that – irrespective of the macroeconomic overlay – there are significant bottom-up investment opportunities, while the globalised investor base, together with market reforms, could provide a boost to top-down returns.
We see five core factors driving equity market performance.
1. An opportunity set too big to ignore
China is the world’s second-largest economy at two-thirds the size of the US-based on GDP, with over four times the population.
China % of world, 2021 estimates
2. Private entrepreneurs are driving the economy’s long-term direction
In 2020, five of the top 10 MSCI China Index constituents were private companies, compared with all 10 being SOEs in 2008 (source: MSCI).
3. Market accessibility is improving
Companies are becoming more transparent and focused on investor returns. The aggregate dividend payout ratio has been gradually increasing over the past five years and company buybacks are also on the rise, particularly in the private sector.
4. Increasing ESG accountability
As of January 2022, the Shanghai Stock Exchange required all ‘STAR’ market companies (China’s version of the NASDAQ) to disclose ESG information in their annual reports.
ESG disclosure on the rise
5. Strong asset diversification
Among major markets, onshore Chinese equities have the lowest correlation with global equities. Even during the Covid-fuelled March 2020 sell-off, when many global equity market correlations increased above 90%, China A-Share correlation remained significantly lower at 56% (source: MSCI).
Getting invested
While the debate remains lively regarding China’s future and what its economy may look like in years to come, we can see clear trends that inform our positive view on the trajectory of Chinese equities. Foreign investors are underrepresented, yet China has a large economy and an even larger population that has a lower dependence on the global economy than many other regions.
We believe investors seeking diversification and idiosyncratic alpha would be well placed to consider increasing their exposure to Chinese equities, monitoring the development of financial market deregulation and index inclusion factors.