Tilting for the emerging market: the China factor

Back in 1980 China was bottom of the investment list; a closed country – yet to experience economic development, let alone concerts by pop giants Wham! Now, on a measure of economic strength based on productivity and living standards, the ancient nation is an emerging market investment streets ahead of the US: £28 trillion to £23 trillion. Studies say this 23% gap could widen to 36% by 2029.

Something of interest…

There’s an expression thought to be Chinese: “May you live in interesting times.”

Like many apocryphal quotes, it contains some truth: we like to imagine an age-old Chinese philosopher saying it. In reality, it might have come from Terry Pratchett instead.

Anyway, China’s been interesting over the last few market cycles – as the chart shows. The dark blue line is the Chinese market, light blue is the world market (including China) and yellow is emerging markets (again, with China in it). Lots of ups and downs.

This is important because if you invest, you’re highly likely to have money in China. How much will depend on your circumstances, risk appetite, and so on.

Forever(grande) blowing bubbles

Covid hit China – as we all know – but a bursting property bubble was probably more meaningful. As one commentator says, “China’s housing bubble was the biggest the world has ever seen. At its peak, housing represented 29% of GDP. It is no surprise that the boom is now being followed by a bust, with Beijing prices falling 10-30% from their peak.”

China’s Evergrande also collapsed. Once the world’s most valuable real estate company, it was unable to honour its debts. It leaves more than 1,300 projects in 28 cities.

Imagine the headlines in our house-price-obsessed newspapers if we saw that here? But the Chinese love of the house outstrips our own; a home has deep cultural meaning, linked to notions of prosperity and marriage.

China’s government responded with measures to bolster markets and confidence. They’ve made it easier for first time buyers. And you can roll your mortgage loan over to the next generation. I’m not sure what my kids would make of that!

I don’t know if these measures will work. They could.

East looking up?

But there are plenty of other reasons for optimism. Analysis says China spends more on research and development than European countries – and the nation is about to become the leading car exporter.

This – plus other reasons – is why Chinese shares have done okay this year. It’s chiefly the large companies, what people like me call ‘national champions.’ One is Bank of China, which has done very well since the start of 2023. Oil major SINOPEC had an encouraging 2024. Many of these companies are solid payers of dividends.

I said earlier that this is important. It’s because of a thing called factor investing.

Years ago, academics worked out that persistently successful investments have commonalities – shared ingredients that can boost returns. They call these ‘factors’. For example, buying companies whose share price is lower than its true value is a factor.

And emerging markets is another factor, because economic growth in emerging markets tends to outpace that of developed markets. And an emerging markets bias has the potential of boosting your returns and lowering the volatility of your portfolio, according to index giant MSCI.

If you’re benefitting from an emerging markets factor, you need to think about China. That’s because the country is about a quarter of all emerging markets.

West looking down?

There are issues all over the world – and the BBC argues America isn’t immune. That’s because this bastion of developed markets investments is slowing down, possibly into recession, based on poor jobs data.

So perhaps China is on the way up and other markets are heading down?

The economic data I started this piece with suggests that’s the case. It could mean that the portion of money you have in China will do well – or at the least counterbalance any falls in your allocation to America.

Moreover, if you take a long-term view, as any wealth-builder should, China looks relatively positive.

As always, no-one knows the future. But any reasonable assessment, looking at the evidence of history, suggests emerging markets – with China amongst them – could give you that little bit extra you might need.

We use evidence-based investment methods for our clients. If this sounds like something that would work for you, please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.ft.com/china

[2] https://en.wikipedia.org/wiki/Interesting_Times

[3] https://www.msci.com/documents/10199/aa99c3a4-d48b-44ac-8caa-49522caa9021

[4] https://www.icis.com/chemicals-and-the-economy/2024/05/chinas-housing-market-moves-from-boom-to-bust/#:~:text=China’s%20housing%20bubble%20was%20the,(Rmb%2052k)%20in%202023.

[5][5] https://www.bbc.co.uk/news/business-58579833

[6] https://www.troweprice.com/institutional/uk/en/lp/global-market-outlook/china-outlook.html#:~:text=Chinese%20equities%20have%20been%20disappointing,following%20the%20post%E2%80%91COVID%20reopening.

[7] https://markets.ft.com/data/equities/tearsheet/summary?s=601988:SHH

[8] https://markets.ft.com/data/equities/tearsheet/summary?s=600871:SHH

[9] https://www.vaneck.com.au/globalassets/home.au/media/managedassets/library/assets/white-papers/emerging-market-equities-analysis.pdf

[10] https://www.msci.com/www/blog-posts/exploring-factor-investing-in/03912807353

[11] https://www.bloomberg.com/news/articles/2024-01-08/china-s-weight-in-key-emerging-market-index-drops-to-record-low

[12] https://www.bbc.co.uk/news/live/c5ykkryglp3t

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.