Institutional investors should consider greater allocations to China to benefit from long-term opportunities and help manage their risk, analysis by Willis Towers Watson (WTW) suggests.
In research published today, WTW explains how trends towards decoupling and the unravelling of globalisation are increasing the importance of China as an investment destination.
However, foreign ownership of Chinese onshore assets is currently low, largely because capital markets have historically been difficult for outside investors to access.
Average allocations to China are about 5% of growth portfolios, but WTW said that investors should grow these to as much as 20% over the next 10 years as they provide diversification benefits and attractive alpha opportunities.
“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,” said Liang Yin, director in WTW’s investments research team and China specialist.
“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.”
The 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.
WTW said that 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 that the time to start building that knowledge and exposure is now.
The research also demonstrates why asset owners should consider Chinese equities as a stand-alone allocation.
“China is underrepresented in most global investment portfolios,” said Paul Colwell, WTW's head of advisory portfolio group, investments Asia. “Its size and scale make it worthy of a stand-alone allocation, but most asset managers lack the expertise to handle this.
“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.”
Image credit: iStock
Author: Chris Seekings