While there is definitely some concern, that is by no means the full picture. The country actually has an attractive market for a variety of reasons, many of which give China long-term appeal. Five reasons stand out as key factors for a China investment now, and in our view they more than outweigh the negatives:
Too Big to Ignore
More than anything, the reason to watch China is that it is simply an unavoidable economic force. This is best evidenced by its incredible rise since the start of the millennium. Since 2000, the economy has grown nine-fold.
China is now the second largest economy in the world, accounting for a full 15% of the global economic pie. As shown in the chart below, this is a massive change from 2000, and demonstrates just what a serious economic competitor the giant has become in under two decades:
One Belt One Road
This influence over the global landscape is unlikely to dissipate in the near future. Not only is China still growing its economy at a healthy clip, but the nation is quickly expanding its ‘One Belt One Road’ initiative.
This is basically a resumption of the Silk Road but will feature modern infrastructure such as pipelines, railroads and ports. In theory, it should also tighten economic relations between China and much of Asia, not to mention Africa and Europe as well. And since China is already the top trading partner for 124 countries without this new infrastructure system, the potential is near limitless for the country to deepen its trade ties even further as this plan comes to fruition.
Source: Mercator institute for China Studies.
Migration of benchmarked capital
One of the biggest reasons to consider a China investment now is the inclusion of Chinese A-Shares into MSCI-linked indexes. An astounding $6 trillion is benchmarked to indexes that could include Chinese A-shares, so sizable inflows into this market are expected from benchmark-trackers.
In fact, our estimate is that more than $400 billion will go into A-shares once full inclusion happens, largely thanks to more than a quarter trillion from emerging market indexes alone. Not only will this help to further globalize the Chinese market, but it will make a complete China investment crucial to achieving proper foreign market exposure.
Diversification
In addition to this return potential, China—and in particular A-Shares—offers investors incredible diversification potential. The correlation between the main China benchmark, CSI 300, and global markets is astoundingly low.
And though correlations may rise as the market becomes more open, China remains a very unique market with its own economic and demographic drivers. That could help correlations remain subdued in the years ahead.
Buffett Indicator
While these factors sound great, it isn’t going to mean much if valuations do not line up. Fortunately, valuations for China’s equity market are pretty reasonable, at least if one considers the ‘Buffett Indicator’ first.
This measure, which looks at the ratio of stock market capitalization to GDP, has been called by Buffett as ‘probably the best single measure of where valuations stand at any given moment’, so it is worth investigating. From this look, China is not only at a relative discount to American markets, but versus global markets as well, suggesting that, at least by this measure, Chinese securities are not overvalued.
Source: World bank as of May, 2018
Bottom Line
Some investors focus on the short-term, and in that respect there are some clouds on the horizon for China. However, over the long-haul the future for China investing appears bright, as evidenced by many key stories which have long term appeal.
Projects like the One Belt One Road are likely to last decades, while others—such as A-Share inclusion—could take years to play out. This suggests that many of the trends underpinning the bull case for China are quite durable, and that it might be worthwhile to look past the short-term issues and consider the long-term case for this surging economy.