Embracing China’s Growth With A Sector-based Approach

On December 11th, Global X expanded its China Sector Suite to offer ETFs covering each of the 11 sectors recognized by the Global Industry Classification System (GICS). By providing investors with access to each major economic sector in China, these funds allow for more targeted exposures and tactical strategies for harnessing opportunities within the world’s second largest economy.

A New Phase for Chinese Growth

Historically, many investors have taken a broad approach to China, looking to capture its growth through emerging market (EM) index funds or through single-country ETFs targeting a broad basket of Chinese stocks. The approach reflects an assumption that the main driver of Chinese stocks is simply their nationality, with returns primarily driven by the country’s overall growth. Rather than focusing on what is owned in China, it prioritizes how much of China is in a portfolio.

Yet after decades of explosive economic expansion, the country has developed a large, complex, and dynamic economy – one that rivals the powerful and multi-faceted economies in the developed world. It features the world’s largest population, second largest gross domestic product (GDP), and over 3,000 listed companies representing over 10% of global market capitalization.1

Chinese Market Capitalization as a Percentage of World

But as China’s economy becomes even larger, overall growth is decelerating, and complexity is increasing. Expectations hold that China will expand at a faster pace than the rest of the world over the next five years, but by a narrowing amount each year. Corporate performance is increasingly being driven not just by broad Chinese economic growth, but by a variety of heterogeneous risks, themes, macro-factors, and government policies. With slowing growth and a more intricate economy, we believe investing in China will require gaining not only broad exposure to the country’s high economic activity, but also more selective exposures and strategies to harness specific opportunities.

Targeted Opportunities within China

Despite declining growth rates, we believe there are plenty of more nuanced opportunities within China that warrant investor attention. By isolating specific sectors, investors can express more targeted views on China’s evolving growth, such as capturing long term, high-growth consumer trends driven by an aging population, rising wages, urbanization, and evolving preferences. Sectors that potentially stand to benefit from these trends include Health Care, Communication Services, Information Technology, and Consumer Discretionary.

Utilizing sectors to access segments of the Chinese economy also allows investors to capture policy-driven growth associated with its strong central government’s key initiatives. One key focus for investors might be China’s Belt and Road Initiative (BRI), which is aimed at expanding China’s land and sea routes, as well as its global economic influence. Under BRI, Chinese Financials, Industrials, and Materials all potentially benefit from the extensive infrastructure projects that connect China with other emerging and frontier economies.

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