Is It Time To Get Excited About Chinese Equities?

  • It’s easy to remember the start of 2016 when China was destined for the so-called “hard landing.” This was the catalyst for a trend of China equity underperformance until the end of the first quarter of 2017.
  • From about the end of April 2017 to May 2018, there was a strong year of outperformance of China’s equities over broader emerging markets. During this period, we started hearing about the “China-FAANG” stocks as the Information Technology sector was strong, similar to what was seen in the U.S.
  • Emblematic of the trade tensions in place through the second half of 2018, China’s equities began to underperform broader emerging markets. This was a tough period for emerging markets overall, featuring tightening monetary policy from the Fed and a strengthening U.S. dollar. Notably, China is also the world’s second-largest economy, so it is difficult to see much in the way of performance from emerging markets without China following suit.
  • Similar to how the appreciation of the British pound may be implying the possibility of an eleventh-hour BREXIT deal coming together, China’s equity market seems to be front-running the possibility of a trade deal with the U.S. We’ve seen outperformance of China’s equities to start the year.

Figure 1: The Sweeping Trends of China’s Equities vs. Broader Emerging Markets

(Click on image to enlarge)

Chinas Equities vs. Broader Emerging Markets

It may be tempting to think about individual sectors within China to increase the octane and cyclical nature of any strategy. Figure 2 indicates just how challenging that might be. In 2017, for example, the spread between the best and the worst of the GICS sectors was around 100%. To mitigate the risk, we think broad exposure to China’s equity market, as opposed to betting on certain sectors, will benefit any asset allocation looking to invest in China.

Figure 2: Gauging the Massive Shifts in China’s Sector Performance

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