China a strong opportunity for SA investors, despite trade tensions
Despite ongoing trade tensions with the US, Chinese government policies and proactive market evolution continue to ensure strong opportunities for investment.
Around 60% of global equity investments are currently invested into America, yet China is set to become the world’s biggest economy by 2030. In contrast, Chinese equities are significantly underrepresented in global market indices. Shares listed on the Chinese mainland currently have negligible representation despite being the second largest stock market in the world. There were challenges with access for foreign investors in the past although they have largely diminished over recent years.
Earlier this year, the National People’s Congress of the People’s Republic of China (PRC) passed the Foreign Investment Law of the People’s Republic of China, which will come into effect in January 2020. The Foreign Investment Law was formulated to further expand opening up of the Chinese economy to foreign investors, and to better protect the rights and interests of foreign investors.
The above comes amid growing interest from global investors, and the MSCI inclusion of Chinese mainland shares in its indices for the first time in 2019. Where previously the Chinese government controlled access to investments in local companies and kept offshore investors out, the recent deregulation reflects a major structural shift taking place in the Chinese economy.
Poverty reduction is one of the government’s main goals, and they are making great strides to achieve this. As the Chinese population grows wealthier in a more open economy, there is significant opportunity for investors.
As the Chinese population’s standard of living moves up, they are likely to buy more consumer goods. We believe that the Chinese companies making those consumer goods are a lucrative investment opportunity. Our expectation is that investments in these companies will offer high returns for many years to come.
We also expect that the MSCI indices will continue to increase China shares in their portfolios over the next five years, and so there’ll be a steady increase in international investment. For a more active investor, getting in early allows them to buy into these shares at a lower price – which enables a better return.
South African pension funds have already benefited from having exposure to China via their investments in Naspers, which has a significant shareholding in Tencent, a Chinese technology company. There are risks, however, associated with such a large exposure to a single company, and the recent opening up of access to an increased range of Chinese mainland shares offers an excellent opportunity for these investors to diversify and obtain exposure to the broader Chinese market.
Investors should beware, however, that China is a more volatile and more risky investment – but with greater risk comes greater potential reward. We typically recommend that investors with SA equity investments invest no more than 5% of their whole portfolio. It’s not a large allocation, but it’s enough to generate extra returns without putting their whole portfolio at risk.