Will the Chinese year of the Rat be prosperous?

Sam Slator 20/01/2020 in X Strategy

The Chinese year of the Earth Pig was a pretty good one for investors in the country’s stock market: the MSCI China index rose 14%* (2%* more than the wider Asian stock market) and the average China equity fund returned 20.1%*. Not a bad result considering the continued slowdown in its economy and the ongoing trade wars with the US.

But what will the new year of the Metal Rat, which starts on 25 January 2020, hold in store?

Rats get a bad rap: when I asked my colleagues what they thought of them the words “disgusting” and “dirty” were mentioned. But actually they are extremely clean animals, spending several hours every day grooming themselves and their group members. Apparently they are less likely than cats or dogs to catch and transmit parasites and viruses.

They also take care of injured and sick rats in their group, have excellent memories, make happy “laughter” sounds when they play and can go longer than a camel without having a drink of water. According to the 2020 Chinese horoscope, the Rat is also the first sign from the 12 animal cycle of Chinese Astrology. For this reason, 2020 is considered a year of new beginnings.

2020: a year of new beginnings

When it comes to new beginnings, that’s exactly what we are seeing in terms of China A Share inclusion in emerging market indices. The shares – which are listed on mainland China, priced in the Chinese currency the Renminbi, and were historically only available to Chinese investors – have been made more available to foreign investors in recent years.

In November 2019, the MSCI concluded a three-stage increase in the A Share weighting in its emerging market indices, including a large number of medium, as well as large, businesses. A Shares now represent 12.1% of the MSCI China and 4.1% of the MSCI Emerging Markets indexes (33.6% when added to other Chinese stocks already in the index)**.

A market of more than 3,500 companies, with a combined capitalisation of $6 trillion, the potential opportunities in Chinese A Shares are obvious. And anyone invested in them would have been rewarded in the year of the Earth Pig: the MSCI China A Share index rose 27.5%*.

Matthews Asia Portfolio Strategist Jeremy Murden, commented: “The previous Chinese exposure within the MSCI Emerging Markets Index and other indices was heavily weighted to mega-cap internet companies and large Chinese banks. The recent increases, and future increases in A-shares exposure, and a further broadening of the universe to include small-cap stocks, will allow the indices to better reflect the opportunity set within Chinese equities.”

Darius McDermott, managing director of FundCalibre, added: “I believe China’s weighing in indexes can only continue to grow. At the moment, for example, the MSCI ACWI World Index – which is supposed to represent to global stock market with constituents from more than 20 developed and 20 emerging market economies – has 55.6% in US companies and just 4.2% in Chinese ones***. China is the second largest economy in the world – and is extremely underrepresented.”

Elite Rated Chinese Equity funds: performance during the year of the Earth Pig*:

Fund/Trust% returns*
First State Greater China Growth23.85%
Fidelity China Special Situations22.56%
Invesco China Equity19.16%

 

*Source: FE Analytics, total returns in sterling, 5 February 2019 to 16 January 2020.
**Source: Global X, January 2020
***Source: MSCI, 31 December 2019

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