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2021 Midyear Market Outlook
China: Too Big to Ignore
China’s economic and financial evolution appears poised to accelerate in the wake of the pandemic. The implications are sizable both for the global economy and for the geopolitical balance of power. Yet, many investors may be underexposed to one of the world’s powerhouses of growth potential.
While the change of administrations in Washington has eased some tensions, the U.S.‑China relationship will remain contentious, Sharps predicts. This doesn’t rule out cooperation on specific issues like climate change, he says. But the Biden administration’s decision to keep some of the tariffs imposed by his predecessor demonstrates that the relationship has permanently changed.
“China’s economic influence is undeniable, but I think it’s turned out differently from what most Western policymakers expected when China was admitted to the World Trade Organization,” Sharps argues. “It hasn’t necessarily resulted in China becoming a more open society.”
Despite these frictions, China continues to free some sectors—such as financial services—for increased foreign participation, Sharps notes. But potential investors need to recognize that China is determined to control the terms of their involvement. “I think Beijing basically has decided to forge its own way and play by a different set of rules, which I think are still unfolding.”
China is innovating…and overall spending on research and development has accelerated.
At a time when short‑term rates in many developed countries hover near zero, China’s credit markets offer attractive current income potential, according to Vaselkiv. “With a 10‑year Chinese government bond yield sitting at around 3%, plus an appropriate credit spread above that, there clearly are opportunities for credit pickers,” he says. But active management, backed by locally based research, could be critical to success.
Although efforts by Chinese regulators to slow credit growth and several recent high‑profile defaults have raised concerns about financial stability—particularly in China’s real estate sector— Vaselkiv views stricter market discipline as a long‑term positive. “That’s how credit markets mature over time,” he says.
A Broader View of Chinese Equities
Chinese equities also provide a rapidly growing opportunity set for global investors, but one that may be underestimated, according to Thomson. Despite the rapid rise in China’s share of global GDP, the country still carries a relatively small weight in Morgan Stanley Capital International’s All Country World Index (MSCI ACWI) (Figure 4). Thomson cites several reasons why he believes limiting exposure to benchmark levels could be a mistake:
- Better corporate governance and capital allocation policies. “They still have some way to go, but things are improving,” Thomson says.
- Market breadth. Over 5,200 public companies are now listed on Chinese exchanges—more than in the U.S.1
- Initial public offerings. From the end of 2018 through May 2021, almost 900 Chinese firms went public.2
Yet, international investors still tend to focus on a handful of well‑known stocks in China’s e‑commerce and technology industries, Thomson says. He thinks more attractive potential opportunities may be available in areas such as biotech, health care, and financial technology. “China is innovating in these areas, and overall spending on research and development has accelerated,” he adds.
China Is Underrepresented in Global Equity Benchmarks
(Fig. 4) Change in China’s share of global GDP vs. change in MSCI ACWI market capitalization*
*MSCI ACWI shares may not total to 100% due to rounding.
Sources: International Monetary Fund, MSCI, and FactSet (see Additional Disclosures).
1 Data from FactSet (see Additional Disclosures). Current as of May 31, 2021.
2 Data from Bloomberg L.P. Current as of May 31, 2021.
Additional Disclosure
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Haver Analytics—(Japan Cabinet Office, Statistical Office of the European Communities, UK Office for National Statistics, U.S. Bureau of Economic Analysis, China National Bureau of Statistics)/Haver.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2021. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
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Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Small-cap stocks have generally been more volatile in price than the large-cap stocks. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Investments in alternatives and hedge funds are difficult to value and monitor when compared with more traditional investments, and may increase the fund’s liquidity risks. All charts and tables are shown for illustrative purposes only.
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