Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why China A-shares are standing out once again
Last year the Australian All Ordinaries index rose by 13.6 per cent in 2021 and S&P/ASX 200 rose by 13 per cent. Total returns including dividends on Australian shares rose 17.7 per cent in 2021 after a near 4 per cent gain over 2020. During the same time, the Shanghai Composite was down -5.41 percent but was down as much as -18.66 percent during its zero Covid policy, regulatory crackdown and property crisis.
Tipped to be the largest economy in the world, yet most client portfolios contain little to no exposure to this growing asset class. While the ease of access has often been cited as one of the reasons for the omission, there are a number of managed funds and ETFs that cover China A-Shares that can easily be implemented.
However, the key portfolio advantage of including China-A shares is diversification. Surprisingly, China-A shares have a very low correlation to Australian equities, despite both countries being linked by trade with significant revenue generated on both sides.
According to VanEck, “Diversification to China equities can benefit portfolios and 2022 has been a case in point. During the first quarter, Australian equities did well relative to their global peers. During that quarter China was among the worst performing global equity markets. Fast forward to the end of June and China equities were the star. Australian equities, the laggard.”
During 1Q22 Australian shares were up 2.24% while Chinese equities were down -16.81%. And fast forward to 2Q22, Australian shares were down -10.13% while Chinese equities were up 9.04%.
| Asset class | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| 1 Australian equities | 1 | ||||||||
| 2 Emerging markets equities | 0.48 | 1 | |||||||
| 3 International equities | 0.71 | 0.56 | 1 | ||||||
| 4 UK equities | 0.64 | 0.54 | 0.74 | 1 | |||||
| 5 US equities | 0.67 | 0.5 | 0.98 | 0.64 | 1 | ||||
| 6 Japanese equities | 0.46 | 0.48 | 0.67 | 0.53 | 0.61 | 1 | |||
| 7 European equities | 0.65 | 0.59 | 0.88 | 0.83 | 0.79 | 0.59 | 1 | ||
| 8 FTSE China A50 Index | 0.03 | 0.56 | 0.15 | 0.15 | 0.13 | 0.28 | 0.14 | 1 | |
| 9 MarketGrader China New Economy Index | 0.05 | 0.31 | 0.17 | 0.08 | 0.17 | 0.13 | 0.11 | 0.59 | 1 |
Looking at the VanEck table of correlation above, you can conclude that the Australian equities market is lowly correlated to China A-Shares, making it a great diversification tool for investors to use to reduce overall portfolio risk.
The other reason is that most economists are bullish on China this year. With the rest of the world enjoying a post-Covid recovery rally, China is only just returning to work and normality. During this, the market will tend to rally on the back of rising consumer and investor confidence.
There are only a few ways investors can gain exposure to China A-Shares. Wholesale investors can gain exposure through the likes of Mingshi who are quantitative investment managers focused on China’s capital markets. Retail clients can gain exposure through various ETF providers that cover China A-shares including Van Eck.
