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China opening up opportunities for investors

Nicki Bourlioufas  |  14 Aug 2017Text size  Decrease  Increase  |  
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An exposure to Chinese shares will benefit investors but placing your funds with the experts is likely to yield a more positive investment result than investing in stocks directly, according to Morningstar analyst Matthew Wilkinson.


The Chinese government has opened more of its financial markets to foreign investors in recent times and this is allowing Australian investors to get involved in the Chinese growth story.

According to recent data compiled by Bloomberg, China's US$6.82 trillion ($8.63 trillion) equity market trails only the US, and is bigger than the combined markets of the UK and Germany (US$5.68 trillion).

"China is obviously very large and growing, and there are a lot of companies there. But, what I would say is that to invest successfully, you have to overcome a lot of corporate governance issues and a lack of transparency. So, for any retail investor, picking stocks is highly risky," says Wilkinson.

"I think you'd be better off with an expert--there is no way that I'd go off and pick stocks myself. And with the governance and transparency issues, you need people who know what is going on in China and the businesses in which they invest. Having said that, we think things are slowly improving in terms of corporate governance.

"But there is still quite a lot of inefficiency in that market so that presents opportunities for good active managers who can, over the long run, outperform passive vehicles. We would encourage a diversified approach to investing in the region to reduce risk by either using a pan-Asian strategy or even an emerging market strategy for exposure to the potentially higher growing economies including China."

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Wilkinson names the Platinum Asia Fund [9894], Silver-rated by Morningstar, as being one managed fund option for investors interested in China.

According to Platinum, "we remain strongly positive about the potential of our Chinese holdings. 2017 has seen some debate regarding the sustainability of the 'reflation trade'. We think there is an assumption implicit in this language that the current recovery is unsustainable. We disagree. We see clear evidence of a durable recovery in economic activity in China."

The fund holds over 50 per cent of its assets in China, with 23 per cent in IT and another 20 per cent in financials. While the fund has underperformed in its benchmark over the last three years, that shifts to outperformance on a five year-plus timeframe.

According to Wilkinson, the BT Wholesale Asian Share [4246], also Silver-rated by Morningstar, is another fund to consider, with around 22 per cent of its assets in China.

In addition, the Bronze-rated Macquarie Asia New Stars No 1 Fund [18337], with 24 per cent of its assets in China in June 2017, is another consideration, says Morningstar's Wilkinson. Despite a rough couple of years in 2016 and 2017, the fund has surpassed its benchmark since inception in 2010.

According to Macquarie's June Monthly New Stars performance report, the rally in Asian markets since the start of 2017 continues to be supported by strong foreign inflows into the region.

"Calendar-year-to-date inflows reached around US$27 billion, surpassing last year's total, as investors take notice of the region's improving fundamentals," the report said.

"MSCI, a provider of global indices, announced that it would be adding Chinese domestic A-shares into its indices.

"This is a major developmental milestone for the Chinese stock market and the move comes after four years of consultation with the investment community. The process of inclusion is gradual and touted to begin in May 2018; the current proposal has the initial index weight of China A-Shares at less than 1 per cent of the MSCI Asia ex-Japan index and will slowly be expanded over the coming years."

MSCI's move could trigger an inflow of as much as $266 billion into China's equities over the next five years, according to recent forecasts by Goldman Sachs.

Investors will likely benefit from the changes index providers are undertaking to get a bigger representation of China in their indices. Another big global index provider, FTSE, announced moves to include China A Shares in its global indices back in 2015.

Locally, MSCI's move will be a push for both active and passive fund managers to include China A shares in their investment products.

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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