The Metrics
If you’re not convinced by the subjective nature of the arguments so far, then consider the following. We took the monthly returns of the CSI 300 (the main Chinese benchmark of A-shares) and the S&P 500 from early 2002 to May 2017 and calculated the returns, risks and correlation of these two markets, as well as a 90%/10% combination of the two (assuming monthly rebalances).
The results are shown in the table in Figure One. Note the incredibly powerful result of adding a clip of a relatively uncorrelated asset class to a US portfolio. Despite having a considerably higher volatility, the low correlation of Chinese and American stocks (at 0.30 over this period) resulted in a portfolio with higher return and lower risk. In our opinion, this evidence alone makes China a very compelling market to consider.
Ultimately, whether you invest in China or not, we’re firmly of the view that, as the world’s second largest equity market, the decision demands careful scrutiny. Clearly, MSCI is now of the opinion that China has come far enough to justify the relabeling of the onshore market, and allocation in some of its key indexes should follow as a result.
However, be aware that the proposed allocation is not likely to transpire for nearly a year and, when it does, it will still only account for a small proportion of the far larger onshore market. But that doesn’t mean that wider access is impossible. Indeed the Chinese A-share market is more widely available to investors through various means (including, full disclosure, via a number of ETFs offered here at Deutsche Asset Management).
But, the recent decision aside – and, to be clear, we welcome it – we were already positive on the Chinese macro picture, its market reforms, and the profound impact that it can play in a portfolio – we’re bulls on a China shop.