China and Hong Kong have both been attractive investment propositions for those looking for emerging market equity exposure.
As a whole, China has high growth characteristics and even though its GDP growth is now single-digit, it still far outstrips that of major western economies.
Much of this growth has been spearheaded by mainland China, rather than Hong Kong, however, as the mainland invests heavily in infrastructure and automation.
For example, Jeremy Lang, co-founder and partner of Ardevora Asset Management, says: “China has sought to move up the value chain into many other areas.
"A move towards automation is the natural progression for the country, which is seeking to transition to a consumer-led economy.”
In turn, this has been helping to drive local and global trade. Maarten-Jan Bakkum, senior emerging markets strategist for NN Investment Partners, explains: “A key driver for emerging markets is the pick-up in global trade, which is partly the result of good growth dynamics in China.
“The recovery in capital flows to emerging markets is the main reason why their financial conditions continue to ease.
“This is producing the first meaningful pick-up in their credit growth since the 2009-2011 post-Lehman boom. Stronger credit growth, from 6 per cent in quarter one to 8 per cent now, should help give legs to the domestic demand recovery in the coming quarters.”
But does the headline-grabbing growth and infrastructure story for domestic China have room to play out, and will it continue to help fuel a boom in emerging markets and, indeed, elsewhere globally?
Some investment managers believe so. Josh Crabb, head of Asian equities for Old Mutual Global Investors, comments: “We believe China’s domestic CSI 300 index trades on an attractive forward price/earnings multiple of 11.6 times, having significantly underperformed other major emerging indices since the start of 2016.”
He also believes the recent addition of 222 A-shares to the MSCI will boost China’s mainland equity market. “With a market capitalisation of US$7.7trn (£5.97trn), the Chinese equity market is the second largest in the world, although remains underrepresented in major global indices,” he says.
Assuming eventual 100 per cent A-share inclusion, some market analysts are predicting approximately $300bn (£232.6bn) of incremental inflows, which would give China greater international accessibility and lead to vastly improved trading standards.
Fewer analysts, greater potential
However, greater inclusion and accessibility could mean the current valuation discount cited by Mr Crabb will start to reduce as investors start to understand Chinese corporates better and greater numbers of analysts pore over the details of domestically listed companies.
According to Gary Monaghan, an investment director based in Hong Kong for Fidelity International, the fact that global analysts have not rushed to the mainland means there are some “incredible” investment opportunities in the mainland market for long-term investors.
