China A-shares remain underrepresented in investors’ portfolios. Find out why you can’t afford to miss out on the opportunities in China’s onshore equity market.
By Claire Peck, Investment Specialist for Emerging Markets and Asia Pacific (EMAP) Equities, and Ivan Durdevic, Head of ETF Distribution for Switzerland, Germany and Austria, J.P. Morgan Asset Management
Although China is one of the world’s largest and fastest-growing economies, we believe investors are underweighted in Chinese equities. International investors’ total China exposure is just 4.6 percent of their total AuM.1 While China accounts for around 34 percent of the MSCI EM Index, only about 5 percent of this is onshore Chinese equities (China A-shares).
As part of our 2022 study on long-term capital market assumptions, we explore three ways that Chinese A-shares can help enhance risk-adjusted returns.
1. Delivering High Single-Digit Annual Returns
We have lifted our long-term annual returns forecasts to 6.6 percent in local currency terms and 8.2 percent in US dollars (6.5 percent in Francs), up from 6.3 percent and 7.5 percent (6.4 percent in Francs), respectively last year.2 These are considerably higher than our developed market equity return assumptions.
The upgrades to our forecasts were driven by a greater rotation towards new economy sectors and the expectation for significant international and domestic investor flows. Among the key factors that could further affect our long-term assumptions for Chinese assets are: the pace of structural reforms; policies seeking to rebalance efficiency and equality in the economy; liquidity; and the external environment.
2. Clear Diversification Benefits
Chinese onshore equities have historically had a low correlation to other assets, offering investors potentially attractive portfolio diversification opportunities. Correlations will likely rise as foreign investor participation in the Chinese market rises, but we believe correlations will remain low relative to developed market assets, given China’s distinct economic and policy cycles.
A-shares delivered positive returns in 2021, albeit more muted than global equities, as China tapered its stimulus. With China now set to ease policy at the margin, while the Federal Reserve tightens policy, we think China could once again diverge from the global business cycle.
We modeled Chinese equities’ return projections, their correlation to other markets and volatility risk, based on historical data. A dedicated allocation to A-shares of up to 10 percent over and above the current benchmark index weightings resulted in a more optimized portfolio with an improved efficient frontier — which means A-share investors can expect higher returns for each given level of additional risk.3
Source: MSCI, J.P. Morgan Asset Management; FactSet, Standard & Poor’s. Correlations are based on monthly price return data in U.S. dollar terms for the period 02/28/2007–01/31/2022. The efficient frontier returns and volatility are based on the J.P. Morgan 2022 Long-term Capital Market Assumptions (LTCMA) estimates. Guide to China. Data are as of January 31, 2022. (To enlarge, simply click on the graphic)
3. Exposure to China’s Consumer-led Economy
China’s equity market is shifting towards sectors that are benefiting from its transition to a more consumption- and innovation-driven economy, and away from sectors that are more reliant on investment and exports. The beneficiaries of China’s economic transformation include consumer goods, technology, health care and high-end manufacturing.
We expect these shifts to continue. China A-share investors have more exposure to these high-growth sectors than to emerging markets overall. The MSCI China A Index also gives considerably greater exposure to small and mid-cap stocks that typically service the domestic economy and are less subject to Chinese regulatory interventions, which have targeted mega-cap companies that are generally listed offshore.
Investment Opportunities
The onshore market in China offers significant investment opportunities. The China A Research Enhanced Index Equity (ESG) ETF provides access to onshore Chinese A-shares by exploiting stock-specific insights with the goal of steady surplus returns on a similar risk profile and a robust ESG framework.
- Explore here more about the benefits of China A-Shares for active ETF investors.
1Performance of an Ideal China Allocation Strategy from the Asset Owner’s Point of View, Greenwich Associates, 7 April 2020. An astounding 68 percent of investor respondents stated that EM equity strategies are their main source of exposure to China; 21 percent access Chinese fixed-income investments through EM bond strategies.
2Forecasts are not a reliable indicator of future performance.
3Forecasts are not a reliable indicator of future performance. Diversification does not guarantee positive returns and does not eliminate the risk of loss.
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