No time to be pig-headed

The trade war is dominating headlines and shaking investor confidence in China. But as we enter Year of the Pig, it’s worth remembering this is a long-term growth story.

No sooner have the Christmas decorations come down than new ones have gone up to mark the Lunar New Year, which starts on February 5.

It’s good riddance to Year of the Dog and welcome to Year of the Pig – a symbol of wealth and prosperity in the Chinese zodiac. What a dog of a year 2018 was for global equity markets and especially for China’s A-share market, with the CSI300 Index1 falling 26%.

As anyone who has spoken to investors in China recently will know, sentiment there is negative. The country’s economic growth is slowing, bankruptcies are on the rise and the US-China trade war is rumbling on.

Importantly, though, China is not on the cusp of the sort of slowdown that might warrant such aversion. While the economy is facing some short-term headwinds, the picture looks much brighter over the longer term.

Policymakers are directing China’s economy towards reliance on domestic consumption to inspire self-sufficient growth. The nation’s rising middle class can power local company earnings for years to come. The country boasts some 380 million millennials, after all, who are earning more than their parents did.

Moreover, China’s economy is growing above 6% a year and its balance of payments is sound, with more than $3 trillion in foreign exchange reserves against $1.9 trillion in external debt. Default rates remain extremely low and policymakers have introduced fiscal and monetary easing measures to drive growth. This improving domestic financing environment has led to a recovery in credit conditions.

From an investment perspective, China is opening up its capital markets to foreign investors for the first time.

From an investment perspective, China is opening up its capital markets to foreign investors for the first time.

Index providers FTSE, MSCI and S&P are increasingly adding China A-shares to their global indices. This will raise miniscule foreign participation in the market, exposing local managements to global standards of accountability and helping to foster a longer-term investment mind-set.

On the bond side, the Bloomberg Barclays Global Aggregate Bond Index2 is set to add CNY-denominated debt from this April. S&P has also just become the first foreign ratings agency to receive approval to rank onshore issuers and issues. Bringing global standards to the process of establishing credit risk will magnify the market’s appeal worldwide.

Authorities are committed to raising the quality of domestic capital markets. It is not just about bringing more foreign investors in. They need to improve governance standards to make Chinese companies more investible for local pension funds as the population ages. This raising of standards is a real positive.

What’s more, the stock market slump indicates that a lot of bad news is already in the price. Valuation levels for the A-share market have come down, offering an enticing opportunity for investors to access industry-leading companies in a fast-growing economy.

At the same time, bond yields remain competitive, interest rates are trending down and correlation to other global markets is low. Exposure to onshore Chinese bonds can improve the diversification and risk-return profile of investors’ portfolios.

It may be the start of Year of the Pig, but this is no time to be pig-headed. China is a long-term growth story.

1The CSI 300 Index tracks the performance of 300 large and mid-capitalization stocks traded on the Shanghai and Shenzhen stock exchanges. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
2The Bloomberg Barclays Global Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market.

Important Information

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

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RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.