Over the last few years, investors have significantly decreased their exposure to Chinese equities as both growth and sentiment have been impacted by the slowing property market.
From a macroeconomic perspective, it is estimated that nearly c.30% of gross domestic product (GDP) in China is linked to property either directly or indirectly. Historically speaking, real estate’s contribution to GDP has stayed relatively stable over the last ten years, with a direct contribution of c.8-10% and an indirect contribution of c19-22%.1
- The Chinese stock market is under-indexed to property and property related names. State-owned enterprises (SOE) and heavy industry have decreased over time while new economy names have grown to be more important within the MSCI China Index.2 We are now seeing a move from traditional 'bricks and mortar' to an increased weighting in newer consumer and IT sectors; a switch from bricks to clicks.
- Chinese internet names are not only important from a benchmark perspective but can also offer a good balance of profit growth with an increasing focus on shareholder returns.
With the recent weakness in the property market apparent, in this paper, we highlight the difference between the stock market and the economy, as well as our thoughts on the Chinese internet space. We look at:
- The evolution of the Chinese stock market.
- How meaningful of an exposure are Chinese internet stocks?
- The internet sector versus MSCI China.
- The emerging theme of shareholder returns.
- The Artificial Intelligence (AI) opportunity.
- How does China’s internet sector compare to US?
Endnotes
- Source: National Bureau of Statistics of China, January 2024.
- The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
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Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
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There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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