PORTUGAL 2021 Midyear Market Outlook

China: Too Big to Ignore

The opportunity set is growing. But global equity benchmarks underrepresent it.

Will Tensions with the U.S. Slow Growth?

China’s recovery from the pandemic has underscored the country’s economic strength. China’s capital markets offer an expanding set of opportunities.

But a rocky U.S.-China relationship creates risks. And while Beijing is still opening some sectors to foreign partners, it is determined to set its own rules.

Chinese regulators’ efforts to slow credit growth should improve market discipline, argues Mark Vaselkiv, CIO Fixed Income. High yields offer potentially attractive income opportunities.

Strong fundamental research backed by analysts on the ground is critical for identifying opportunities and risks.

A Growing Opportunity Set

The Chinese equity market has expanded quickly.
Since 2018, almost 900 Chinese companies have gone public.
Roughly 5,200 companies are listed on Chinese exchanges—more than in the U.S.

Smaller May Be Better

Global investors still tend to focus on a handful of mega-cap stocks.
Investors may want to look for opportunities outside China’s 100 largest names.

The Takeaway

China's relationship with the U.S. will remain contentious and hard to predict.
Relatively high yields make Chinese corporate credit potentially attractive.
Limiting exposure to Chinese equities to global benchmark weights could be a mistake.

When Benchmarks Lag Economic Reality

Despite the rise in China's share of global GDP, the country carries a much smaller weight in Morgan Stanley Capital International's All Country World Index (MSCI ACWI). Justin Thomson, head of International Equity, and CIO Equity, says global benchmarks tend to understate China's importance as a venue for equity investment, especially below the top 100 stocks.

Two Views of China's Global Weight
Change in China's share of global GDP vs. change in MSCI ACWI market capitalization¹

¹MSCI ACWI shares may not total to 100% due to rounding.
GDP shares as of December 31, 2020.
MSCI ACWI weights as of May 31, 2021.
Sources: International Monetary Fund, MSCI, and FactSet (see Additional Disclosures).

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