Investors can participate in the Chinese market’s continued expansion and capture significant opportunities in the emerging economy through targeted exchange traded fund strategies.
In the recent webcast, Emerging Markets: The Triumph of Hope Over Experience, Jason Hsu, founder and CIO of Rayliant Global Advisors, highlighted the difference in growth among emerging economies. Most emerging markets are fast-growing economies, but not all have delivered rapid growth in corporate earnings, which is what ultimately matters to investors. For instance, China has historically generated higher mean real per capital GDP growth and mean real EPS growth, appealing to a broad set of investors.
Phillip Wool, managing director and head of investment solutions at Rayliant Global Advisors, noted that the high EPS growth has helped bolster the China A-shares market or mainland Chinese markets. Meanwhile, offshore China, or international-listed Chinese companies, stock prices traded ahead of fundamentals.
Jason Blackwell, chief investment strategist at The Colony Group, also pointed out that while developing markets help diversify an investment portfolio, the benefits were not all uniform within the emerging markets. Not all EM allocations offer low correlations. China has long been an outlier with respect to diversification benefits in a global portfolio. Specifically, Chinese equities showed a 0.38 correlation to U.S. equities, 0.42 correlation to developed excluding the U.S., and 0.52 correlation to the broader emerging markets.
For example, Wool underscored the recent outperformance in Chinese markets as the policy divergence benefited investors who diversified into China A shares. Since lockdowns eased and China’s stimulus ramped up, A shares have outperformed U.S. stocks.
As more investors consider ways to include exposure to Chinese markets, Wool pointed out that EM indices, like the benchmark MSCI EM Index, include heavy tilts toward East Asian markets, but they include heavy tilts toward offshore Chinese stocks. China is closing in on 40% of EM, but benchmark holdings are still light on China A shares.
Blackwell also noted that looking ahead, the increasing share of China A shares in benchmark inclusions could fuel greater flows to the China A shares market. For instance, at full inclusion, the MSCI EM Index could hold up to 22.6% China A shares and 20.0% China offshore shares, compared to current weights of 5.5% China A shares and 24.4% China offshore shares.
The strategists argued that actively managed strategies could help capture greater alpha. Wool argued that one important factor in a market like China’s is bringing local knowledge to bear, and Rayliant has had a presence in China since 2009.
As investors look for ways to capture the emerging market opportunity, the Rayliant Quantamental Emerging Market Equity ETF (RAYE) can help investors gain broad exposure to developing economies. The Rayliant Quantamental Emerging Market Equity ETF is an active strategy that employs big data and sophisticated quantitative models to identify investment opportunities in emerging market stocks traded around the world. The resulting portfolio is designed to capture emerging markets’ growth, reduce risk, and exploit behavioral bias to outperform a passive approach.
Additionally, the more targeted Rayliant Quantamental China Equity ETF (RAYC) can help investors focus on China. The Rayliant Quantamental China Equity ETF is an active portfolio employing a systematic approach to harvesting behavioral alpha by exploiting mispricings among Chinese stocks traded in markets around the world. The strategy is localized to China, applying specialized data and models capturing features that make Chinese markets unique, including novel aspects of China’s accounting, regulations, market structure, state ownership, and investor behavior.
Financial advisors who are interested in learning more about emerging markets can watch the webcast here on demand