China expert warns on bad positioning

While the China-growth story was not new, an expert in investing in the region said investors should consider if their current exposure to the economic giant took advantage of where future growth was predicted to occur.

Michael Jiang (pictured), a portfolio manager at the Hong Kong-based Harvest Fund Management told attendees at the Conexus Financial Fiduciary Investors Symposium that many fund managers may be unaware that they are poorly positioned to take advantage of the expected boom in consumer demand in China.

Harvest is a thematic investor and stock picker which targets predominately Hong Kong and overseas-listed mainland companies.

Jiang is a Beijing-based portfolio manager responsible for the Qualified Domestic Institutional Investor (QDII) fund.

The fund raises money from mainland mutual fund investors and invests it overseas, primarily in Chinese companies listed overseas.

Jiang said many fund managers that tracked common indexes such as the MSCI China, CSI 300 and HSCEI might not realise that these indexes were typically overweight financial and energy sector and underweight potential future growth sectors.

On aggregate, the financials and energy sectors represented 41 per cent of the CSI 300, 56 per cent of the MSCI China and 81 per cent of the HSCEI.

“While both these sectors have been important beneficiaries of China’s fast growing economy they may underperform at certain stages of the economic cycle,” Jiang said.

Furthermore, Jiang said broader indexes such as the MSCI World index were underweight China, with the index having just a 2.3 per cent Chinese representation.

China, now the world’s second biggest economy, represented 14 per cent of global GDP. Hong Kong and Chinese companies made up 11 per cent of total global equity market capitalisation.

“China exerts a much larger influence on the global economy and on global markets than this (MSCI World Index) weighting would suggest,” Jiang said.

“As a result global investors are typically structurally underweight China with the existing MSCI World Index investing.”

Jiang rated health care, consumer, information technology as growth sectors and noted that on aggregate they made up less than 0.5 per cent of the MSCI World Index.

Their representation in the MSCI global emerging market index was also small.

Other attractive growth sectors such as education, tourism, energy conservation and environment protection were entirely missing from the indexes, says Jiang.

“Investors tracking these indexes do not get exposure to the sweet spots of China’s economy,” he said.

He advised a thematic investment approach to look at cross-sector themes.

Investors looking for additional exposure to these future growth areas should invest in a much less constrained portfolio which was benchmark unaware and had no specific sector guidelines, Jiang said.

A range of satellite-China products offered equity investment portfolios with this capacity.