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Advantage, China

The Middle Kingdom outperformed every major economy in 2020. Should investors re-weight their portfolios towards China?
December 18, 2020
  • Investors can focus too much on political and financial news cycles
  • The country’s economic expansion is set to eclipse most developed nations for years to come

Over the past year, plenty of noise has been made about the S&P 500’s 11 per cent rally to date, amid a sharp economic contraction in the US. In the West, far fewer column inches have been dedicated to the 27 per cent rise in the Shanghai Stock Exchange Composite in dollar terms so far in 2020, or that China’s GDP is on course to grow by 2 per cent in a year in which the global economy was on ice for several months.

Even then, comparing the relative annual performance of the world’s two largest economies only tells one story. By setting a limit on their time horizons, investors can focus too much on political and financial news cycles, and not enough on gradual change, however large.

That Covid-19 looks to have been little more than a bump in the road for the Chinese engine is another reminder that for all its faults, the Middle Kingdom has unmatched strengths in today’s global economy.

This should matter to global investors, who typically allocate less than 10 per cent of their portfolios to emerging markets, according to fund manager Ashmore (ASHM). Direct exposure to China is likely to be a subset of this figure, even if the broader observation elides the fact that most financial markets are impacted by what China consumes and sells.

What’s more, annual outlooks also risk missing the long-term focus of China’s command economy, and a political model unencumbered – in the eyes of its politicians and a growing number of outsiders – by democratic election cycles and the fog of partisanship.

This is not to say investors lack a busy political calendar in 2021. In March, the Communist Party will release its next five-year plan, the 14th such guide for economic and social development since 1953. The importance of high-quality growth, supply-side structural reform, increasing domestic demand, environmental protections and innovation will all be emphasised.

And while policymakers have been careful not to set annual GDP growth targets, a longer-term aspiration for per capita GDP to climb three-fold to $30,000 by 2035 suggests the country’s economic expansion is set to eclipse most developed nations for years to come.

In this context, it’s hard to disagree with Templeton Emerging Markets (TEM) portfolio manager Chetan Sehgal when he says: “We see immense opportunities for China going forward.” The harder question for many UK investors is how to navigate the country’s equity markets, given their volatile track record (see chart below).

Bulls will counter that as China increases access to its financial markets, demand for the renminbi is likely to climb just as the US dollar’s safe-haven status wanes, thereby de-risking one classic emerging market capital flow trap. Bears will point to a mountain of private sector debt, an ageing population and fragmenting global trade. The charge of state intervention is likely to scare others.

Then again, anyone investing in the US or UK faces similar issues, without the growth prospects.