New research from Willis Towers Watson has suggested that institutional investors have overlooked China and they should increase their average growth portfolio exposure of 5 per cent up to as much as 20 per cent over the next decade.
Analysis from the global advisory company has shown that foreign ownership of Chinese onshore assets is low, especially when compared with other major Asian markets such as India, Japan and Korea.
Historically, Chinese capital markets have been difficult for offshore investors to access, but despite recent progress made to open up domestic markets, the average institutional allocation to China is around 5 per cent of growth portfolios.
But Willis Towers Watson has suggested that investors should consider greater allocations to China to benefit from the country’s long-term opportunities, considering its role in a new geopolitical world order, with the evolution of global supply chains.
The group’s scenario analysis has recommended that investors build up an allocation to China of up to 20 per cent of their growth portfolios during the next 10 years.
Liang Yin, director in Willis Towers Watson’s investments research team and China specialist, noted geopolitical tensions and negative rhetoric are “overshadowing the fundamentals of the business environment in China”.
“Ongoing US-China tensions, the movement towards de-globalisation and continuing fallout from the coronavirus pandemic are all to some extent deterring investors from allocating to China,” Mr Yin said.
“However, for global investors who have a long-time horizon, rather than weaken the case, these factors actually reinforce the need to own more Chinese assets to make their portfolios more resilient in a changing and uncertain world. Local financial market reforms have also continued throughout the past few years, making China more attractive and easier to access for global investors.”
While some setbacks are unavoidable, Mr Yin commented that the opening up of the Chinese capital markets is expected to continue over the long run.
Paul Colwell, head of advisory portfolio group, investments Asia at Willis Towers Watson, added that China’s “size and scale make it worthy of a standalone allocation, but most asset managers lack the expertise to handle this”.
“Yet, the China A sharemarket offers a dynamic and broad opportunity set within a ripe market environment for institutional investors to access a new source of alpha,” Mr Colwell said.
“Skillful portfolio managers who can take a longer-term view and focus on fundamentals should benefit, but investors need to get their approach right.”
But asset owners should be careful when selecting their asset managers.
“The key is to find managers who can deliver alpha sustainably over time while also taking a disciplined and risk-aware approach,” Mr Colwell said.
Leslie Mao, head of equity research in Australia, commented that Australian investors often have access to China via locally listed stocks.
“The investment community here has come to realise that commodity stocks only expose their portfolios to the most cyclical part of China’s economy, and miss out many other secular themes that China could offer,” Mr Mao said.
“At the same time, the handful of consumer stocks that sell into China have had various company-specific risks materialise in recent years. Australian investors can no longer be satisfied with such indirect exposure.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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