WHY CHINA?

Unicorn’s investment philosophy centres on value investing; and with our latest investment call, we are putting more money where our mouth is: China.

 

Valuation
Due to an opportunity created by the US-China trade disagreements, China’s markets have fallen about 27% – 52% for H-shares and A-shares respectively1, from their 5-year peak. The Chinese market is also relatively “cheap” in terms of valuation with a PE of 12.85 according to MSCI2. This is in comparison to US’s 19.72 and Europe’s 15.092.  

So what are H-shares and A-shares? According to Investopedia, “H-shares are shares of Chinese mainland companies that are listed on the Hong Kong Stock Exchange or other foreign exchange. A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, the shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment.”

 

Stability
With policies made by a central government, China has remained stable in politics and economic growth, granting them more than 6% growth in GDP annually3. Even though there are concerns about rising debt in China, it is also mitigated with its growth. And with regard to external debt, China’s foreign reserves total $3.09T, giving them a net foreign reserve of $1.19T, compared to US’s –$19.57T and Europe’s –$15.83T3.

 

Growth
Even though their GDP growth has slowed from their dizzy two-digits, China is also set to overtake the US economy by 2030 according to projections4. With domestic demand rising, China is also depending less and less on exports for growth, and also has an expanding middle class to take on the consumption5.

Another aspect of growth comes from the MSCI Emerging Market Index which had previously excluded shares from China’s A-shares. But as China opens up its capital markets, MSCI is adding on Chinese A-shares to the Index. As reported in South China Morning Post, “(a)n inclusion will automatically result in capital inflows to China’s domestic equity market, as all passive index funds and ETFs that track the MSCI EM index will be forced to add those shares in their portfolios.

The full inclusion of domestic Chinese stocks in the widely tracked MSCI Emerging Markets Index could pull more than $400 billion of funds from asset managers, pension funds and insurers into mainland China’s equity markets over the next decade, according to analysts”, benefitting the China A-shares.

With the above reasons, we firmly believe that investing in China would position our assets well and build wealth into the future.

 

References:

1.Google Finance

2.MSCI Indices

3.Trading Economics

4.Bloomberg

5.McKinsey

 

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