Indices and other quandaries over China
The China growth story is putting increasing pressure on index providers to maintain the integrity of their indices. Emerging markets indices, for instance, may be becoming irrelevant.
According to Rob Lovelace, the president and vice-chairman of Capital Group and one of the world’s most influential investors, the index providers “don’t really want to be the ones who are deciding who’s emerging and who isn’t”.
Los Angeles-based Lovelace and London-based Chris Thomsen, portfolio manager, presented to investors via webinar last week (April 21) on the prospects for China and implications for markets and investors.
Lovelace said: “China dominates the emerging markets benchmarks. It’s the second-largest economy in the world and soon to be the second-largest market. And is Hong Kong a separate country? And Macau too?
“It should really find its way into its own orbit like Japan has done. It should have its own vehicle. All of us are working on that. We should really have emerging markets ex-China… Korea, Taiwan and China are clearly in a different place. The world has moved on. The MSCI is trying to slowly include more of China.”
China’s share of global GDP is about 20 per cent, which is much greater than its representation in both equity and bond markets, although those are going up. China makes up about 6 per cent of the ACWI index and 13 per cent of the ACWI ex-US. It makes up about 7 per cent of the Bloomberg Barclays global aggregate index and 8 per cent of the J.P. Morgan emerging markets bond index.
China’s prospects are much brighter than those of most of the rest of the world. “Its balance sheet is strong, and it has tools still in its toolbox that we’ve already used,” Lovelace said. “It is rebounding more quickly. But on the bad side, it is clearly in a more confrontational period.”
He said that investors were all struggling with the best way to get exposure to China – either directly or through companies that trade with China. “Whatever the answer, they have to have a view on China. It’s a question of how much you want and how to get invested.”
Thomsen said he had a positive view of China. It would remain dynamic and remain assertive, even with the Biden administration in the US, rather than Trump. It had tech-driven growth and a dynamic modern economy. R&D spending had risen quickly to almost match that of the US.
“My three-five-year view is that it is very dynamic but there are obvious risks, such as a trade war and tariffs, sudden regulations, such as stopping the Ant IPO and the anti-monopoly laws against international companies,” he said.
China’s GDP growth would remain about 5-6 per cent a year for the next few years and the Government would use fiscal stimulus to maintain that. Of the companies in the ACWI index, 12 per cent of all revenue comes from China, which is the second-biggest share after the US, with 41 per cent.
He said: “There are so many amazing investment opportunities in China. The real evolution had been from the factory of the world morphing into a modern service-based economy.”