Zico's Equity Thoughts : Does China Matter ?
There are no stock rallies I don’t like. And there are few I like better than the rallies in the Chinese stock markets. Earlier in the month, I thought there will be opportunities to take some profits in the Chinese stocks in my portfolio, and re-position the funds for other stocks with the potential to go up further. I did take some of the gains out of the portfolio and re-invest into some of the new names I think will rise with the rally in the overall market. The question now is whether the current rally will last last longer. Again the Chinese stock markets are more interesting than most other markets.
China is the second largest economy in the world and is expected to surpass the US economy sometime in the not-so-distant future. China already accounts for a large part of global GDP growth. And since 7 April 2015, China’s ICBC overtook US listed Wells Fargo Bank as the world’s most valuable bank. So should China matter to the global stock investors?
Not really. Global stock investors are “under-exposed” to the Chinese stock markets. That is because in terms of China’s weight in the MSCI World Index, it hardly matters. The MSCI World Index is an important benchmark – it covers approximately 85% of the free float-adjusted market capitalization in each country in the index. In a sense the aim is to look the investible universe. The US makes up 50.12% of the MSCI All Countries World Index as at 31 March 2015. If you were to look at the latest fact sheet from the iShares MSCI ACWI ETF country weights, China is only 2.7%.
The allocations to China in most global investors’ portfolios do not reflect China’s economic footprint or long term economic growth prospects. On a PPP basis China accounts for about 14% of the global economy.
Simply put the reason for this disconnect is the long-time observation that access to Chinese stocks is restricted and hence the smaller free float. That may be the case ten years ago when ICBC got listed, the argument is growing less valid today. The stock investor today can easily invest into ICBC’s H-share listing on the HKSE, and more recently through the northbound Shanghai-HK Stock Connect get exposure to the ICBC’s A-shares.
Wells Fargo Bank is the 5th largest constituent in the MSCI World Index. Of the ten largest on the MSCI World Index, eight are from the US and the other two from Switzerland. The inclusion of the large Chinese companies in the index will change the look of the top ten.
What about the rising internet/e-commerce giants in China – Alibaba and Tencent. These two and the growing number Chinese IT and internet companies are among the largest in the world. Surely these must be included in the investible for global stock investors. The MSCI folks have moved very slowly(or cautiously) with these changes on the ground. Some may even describe the efforts to be “glacial”.
So the recent rally or some have characterized as frenzy in the HK and Shanghai A shares probably did not have the buying support of the global institutional fund managers. Imagine the consequences of a change or a decision to include the A-shares into the MSCI indexes in a bigger way. The question is not whether it will happen or not, but when and how much. That in itself is worth the wait.
Therefore the rally could last longer than most expect. And the volatility itself will allow trading opportunities that could be very profitable in the quest to achieve positive returns.
A Bit About Zico
Zico is our in house equity consultant who is currently a private fund manager with more than a fair share awards in the course of his illustrious career.
Having managed both global and also regional themed equity portfolios, he specialises in stock picking that maximises returns for his various absolute return portfolios.