Look to China in the search for equity upside

Equity markets generally performed well in 2021 as the global economy gradually reopened. In the first half of the year, the MSCI All Country World Index (ACWI), which represents stocks in both developed and emerging markets, returned 12.30%. Meanwhile, the S&P 500 index returned 15.25% for the period.

While the consensus is that equity markets, as a whole, should deliver good results in the second half of the year as economies continue to reopen, some of the most attractive opportunities appear to lie in Asia right now. Chinese stocks, in particular, appear to offer a compelling opportunity at present. 

This is an area of the stock market to which many investors have a lack of exposure. Today, Chinese stocks only have a 4.85% weighting in the MSCI ACWI, despite the fact that China contains nearly 20% of the world’s population, and the second-highest level of GDP globally. In other words, China is significantly under-represented in global financial markets. 

China is experiencing a strong economic recovery

The first thing that stands out about China is that the country is experiencing a strong economic recovery after COVID-19. In the first quarter of 2021, China’s economy generated record growth of 18.3%. Then, in the second quarter, the economy strengthened by 7.9%. In contrast, the US economy grew 6.4% in Q1 and is estimated to have grown at around 9% in Q21. “China’s economy sustained a steady recovery with production and demand picking up,” said China’s National Bureau of Statistics in a statement in relation to Q2 growth.  

Economists expect China’s strong growth to continue for the remainder of the year and beyond. The International Monetary Fund (IMF), for example, expects China to register growth of around 8.4% in 2021, and 5.6% in 2022 (versus 6.4% and 4.9% for the US). 

One reason China’s economy is performing well at present is that Chinese exports are increasing as a result of strong global demand for goods. In June, exports grew much faster than expected, increasing 32% year-on-year, shrugging off the impact of the global semiconductor shortage, supply chain bottlenecks, and the temporary Shenzhen port closure. 

In addition, demand from within China is strong too. Data from Trip.com Group, for example, shows that during China’s Qingming Festival in early April, the number of hotel bookings increased substantially compared with previous holidays, as did domestic air ticket purchases2. This suggests that there is a lot of pent-up consumer demand after the pandemic. 

As the Chinese economy continues to strengthen, stocks across a wide range of sectors should benefit. Last year, a handful of companies accounted for the majority of returns from the Chinese stock market. Going forward, we should see more balanced market growth. 

China’s tech sector is growing rapidly

Another reason to follow Chinese stocks right now is that the Chinese equity market has a high level of exposure to the fast-growing technology sector. Tech powerhouses such as Alibaba, Tencent Holdings, and Meituan account for around 30% of the MSCI China Index. 

China’s technology sector is expected to experience strong growth in 2021. The e-commerce market in China, for example, is projected to grow nearly 20% this year3. On the back of this growth in e-commerce, mobile payment transaction volumes are expected to grow at a double-digit pace4, boosting the FinTech sector. Meanwhile, electric vehicle sales in China are projected to grow by more than 50%5 in 2021. The growth of these kinds of industries should provide strong tailwinds for companies in the tech sector. 

Chinese equities have underperformed in 2021

A third reason Chinese stocks could have upside potential is that so far this year, they have underperformed. While the MSCI ACWI and the S&P 500 returned 12.30% and 15.25% respectively in the first half of the year, the MSCI China Index returned just 1.89%. After that underperformance, the Chinese market could be due for a rebound as it now trades at a significant valuation discount to the US market. 

As to why Chinese equities have underperformed, much of it is related to regulatory uncertainty. This year, Chinese authorities cracked down on dominant technology companies. Didi Global, which was recently listed on the New York Stock Exchange, is one company that has been targeted. Shortly after Didi went public in late June, China’s cybersecurity regulator, the Cyberspace Administration of China (CAC), announced an investigation into the company. The CAC said the aim of the investigation was to “guard against risks to national data security” and to “protect the public interest.” 

This kind of regulatory intervention is a risk to consider when investing in Chinese stocks as we may see more of this in the future. For long-term investors, however, the uncertainty in relation to regulation may have created a buying opportunity. 

How to invest in Chinese stocks

Those looking to increase their exposure to China may want to consider one of eToro’s CopyPortfolios. Today, we have several portfolios that offer exposure to Chinese equities. 

One such Portfolio is the ChinaTech Portfolio. This portfolio, which is designed to help long-term investors capitalise on the technological transformation China is currently experiencing, provides exposure to a wide range of leading Chinese technology companies that are benefitting from the growth of China’s tech industry. Names in this portfolio include Alibaba, Tencent Holdings, Meituan, and JD.com.  

Your capital is at risk.

Another Portfolio that offers exposure to China is the ChinaCar Portfolio. This strategy provides exposure to a range of top companies that are developing electronic and autonomous vehicles in China, as well as companies that are heavily involved in the production and design of such vehicles. Stocks in this portfolio include NIO, BYD, Great Wall Motor, and Xpeng

Your capital is at risk.

As with all of our Portfolios, ChinaTech and ChinaCar are fully allocated portfolios that are highly diversified, meaning they can help investors minimise stock specific risk. For those looking for portfolio exposure to China, eToro’s Portfolios offer an innovative and cost-effective way to invest.

Your capital is at risk.

CopyPortfolios is a portfolio management product, provided by eToro Europe Ltd., which is authorised and regulated by the Cyprus Securities and Exchange Commission.
Your capital is at risk.

Sources 

1 https://tradingeconomics.com/united-states/gdp-growth

2 https://finance.yahoo.com/news/trip-com-group-data-shows-103100834.html

3 https://www.emarketer.com/content/china-ecommerce-forecast-2021

4 https://thefintechtimes.com/why-2021-will-be-a-big-year-for-fintech-in-china/

5 https://www.canalys.com/newsroom/china-electric-vehicles-2021

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