John: Back in in 2009, the world was in the throes of the global financial crisis. At the time, the Chinese economy was a shining star against a backdrop of recessions in developed markets. Over the last decade, China’s annual GDP growth has decelerated from double digits to below 5%, as its economy has matured and geopolitical competition with the US and its allies has intensified.
In addition to the economy, the financial market infrastructure had also improved significantly over the years. China A-shares’ weight in the MSCI Emerging Market Index has been increasing steadily over the years. Under the current inclusion factor of 20%, China A-shares’ weight is 5.2%. But over the long term, when the inclusion factor increases to 100%, China’s weight will increase to 21.4%, which should lead to increased flows into this asset class. Meanwhile, the Chinese government is committed to improving market access and the quality of its equity markets through recent policy actions such as the broadening of the registration-based IPO scheme.
The market itself has been evolving too. China’s equity market seems to be following the familiar path of other “tiger” economies in Asia, such as Taiwan and Korea, as investors shift their focus from traditional growth names to companies with strong cash flows that have been overlooked by the market. As Korea and Taiwan decelerated into low-single-digit GDP-growth economies at the turn of the millennium, value stocks began to outperform. Indeed, the MSCI Korea Value Index has outperformed the broader index since 2000. We think China will likely follow the same path. After all, with all the negative headlines in the press about China’s economy and its decelerating growth, one would be hard-pressed to call China “the growth market” that it was in the 2010s.