The rise of China in the emerging markets

China’s weighting in emerging market indices has grown 10-fold in the past 20 years.

THERE has been a great deal of publicity recently on the problematic trade deal between the US and China.

This is of huge significance as the two countries represent the largest economies in the world. However, it has not always been easy to gain exposure to the fast growing economy of China via stock market investment. It also has quite a chequered history: when Mao Zedong and the communists seized power in 1949 property was declared null and void and equities became worthless.

Needless to say, things have moved on considerably from those days and in the last twenty years the country's weighting in emerging market indices has grown 10-fold. It now represents at least 30 per cent of the investible emerging markets universe and this is likely to increase as more Chinese A shares are approved for inclusion by western index providers.

The emerging markets universe is still relatively modest at just under 12 per cent of investible market capitalisation. This means that despite the growth to date, opportunities to invest in the emerging space remain relatively inaccessible. Such countries tend to have a higher proportion of ownership by government and larger companies. It is also hard to measure the performance of the Chinese market as indices vary widely, mostly due to the differences in what is and is not included, for example, the FTSE China has seen a growth rate of 10.3 per cent since 1993, whereas the MSCI China index growth rate is just 1.1 per cent and the S&P China BMI is 7.4 per cent. It is therefore hard to obtain a realistic picture of performance.

There is a distinction between the Hong Kong listed H shares and the N shares, which are vehicles for buying into Chinese equities listed on US exchanges and in addition there are A shares on the Chinese mainland. The scope for confusion is obvious.

Correlations between developed equity markets have risen since the early 1980s, but there is still significant variation between developed market and emerging markets. Investors should be in no doubt that investing in emerging markets does inherently carry more risk. Volatility is demonstrably higher; regulation is less stringent than in developed markets and liquidity can be an issue. Clearly the best way to access such markets is through a collective fund, be it a general emerging markets or Asia Pacific fund or a more specialised country specific vehicle.

The number of funds offering exposure to such areas has grown exponentially in the last twenty years, but not all will have as long a life as many of the developed market funds. In the 1990s the so called BRIC funds (investing in Brazil, Russia, India and China) were very much in vogue, but now there seem to be far more opportunities in India and China. Despite the undeniable risks, China does need to continue to integrate with the global financial system and even with the confusion over performance, the economic growth rate (albeit lower now) means that long term investors would be unwise to ignore China. After all the proportion of emerging markets in the widely used performance measure, the MSCI WMA balanced index is now 2.1 per cent, with another 2.4 per cent in Asia Pacific. This almost equates to Europe at 4.7 per cent.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers

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