Chinese assets should build up to 20% of global investor growth portfolios over the next 10 years compared to the current exposure of 5%
SYDNEY, November 30, 2020 – Willis Towers Watson (NASDAQ: WLTW), a leading global advisory, broking and solutions company, today releases two research papers outlining why institutional investors should consider greater allocations to China to benefit from the long-term opportunities the country presents and help to manage their overall risk. Analysis from the research shows that Chinese capital markets provide diversification benefits and attractive alpha opportunities for global investors. The research also demonstrates why asset owners should consider Chinese equities as a stand-alone allocation.
“Geopolitical tensions and negative rhetoric are overshadowing the fundamentals of the business environment in China,” said Liang Yin, Director in Willis Towers Watson’s Investments research team and China specialist. “Ongoing US-China tensions, the movement towards de-globalisation and continuing fallout from the coronavirus pandemic are all to some extent deterring investors from allocating to China.”
“Local financial market reforms have also continued throughout the past few years, making China more attractive and easier to access for global investors.”
Liang Yin,
Director, Investments
“However, for global investors who have a long-time horizon, rather than weaken the case, these factors actually reinforce the need to own more Chinese assets to make their portfolios more resilient in a changing and uncertain world. Local financial market reforms have also continued throughout the past few years, making China more attractive and easier to access for global investors. While some setbacks are unavoidable, over the long run the opening up of the Chinese capital markets is expected to continue,” added Liang.
Foreign ownership of Chinese onshore assets is currently low, especially when compared to other major Asian markets like India, Japan and Korea. This is largely because Chinese capital markets have historically been difficult for outside investors to access. Despite recent progress made by policymakers in opening up domestic markets, the average institutional allocation to China is about 5% of the growth portfolios. By contrast, Willis Towers Watson’s scenario analysis suggests investors should build up an allocation of as much as 20% of growth portfolios over the next 10 years. This analysis considers China’s future role in a new geopolitical world order, the impact of US-China decoupling and the evolution of global supply chains.
“The China A share market offers a dynamic and broad opportunity set within a ripe market environment for institutional investors to access a new source of alpha.”
Paul Colwell,
Head of Advisory Portfolio Group, Investments Asia
“China is underrepresented in most global investment portfolios. Its size and scale make it worthy of a standalone allocation, but most asset managers lack the expertise to handle this. Yet, the China A share market offers a dynamic and broad opportunity set within a ripe market environment for institutional investors to access a new source of alpha. Skillful portfolio managers who can take a longer-term view and focus on fundamentals should benefit, but investors need to get their approach right,” said Paul Colwell, Head of Advisory Portfolio Group, Investments Asia, Willis Towers Watson. “While we strongly recommend active management as the preferred way to access China, asset owners must be extremely careful when selecting their asset managers. The key is to find managers who can deliver alpha sustainably over time whilst also taking a disciplined and risk aware approach,” added Paul.
Leslie Mao, Head of Equity Research in Australia, said Australian institutional investors often have access to China via locally listed stocks. “The investment community here has come to realise that commodity stocks only expose their portfolios to the most cyclical part of China’s economy, and miss out many other secular themes that China could offer,” he said. ”At the same time, the handful of consumer stocks that sell into China have had various company specific risks materalise in recent years. Australian investors can no longer be satisfied with such indirect exposure. It is time to be serious and strategic with your China allocation.”
Trends towards decoupling and the unravelling of globalisation are increasing the importance of China the country as an investment destination. However, some investors are put off by a combination of negative news headlines and lack of on-the-ground knowledge. Building exposure to China should be a journey that balances the pace of market improvements with the imperative to achieve diversity in a global portfolio - and the time to start building that knowledge and exposure is now, the research says.
The research is published in two papers: “Allocation to China in a new world order” and “The merits of a standalone equity allocation to China”.
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential.
