China: Opportunities Outside of Large-Cap Equities
Opportunities Outside of Large-Cap Equities
DAVID LAI: If you look at an overall index, say the CSI 300, it was not exciting in terms of returns. Last year it was down by single digits. However, if you look at different types of stocks, the performances can vary. For example, ChiNext, which is represented by small caps and microchips, was up by over 80% in 2013. It is not a fair statement to say that China's market is a boring market. One of the reasons for the underperformance of large caps is that most of them belong to the Old Economy: financials and energy. These sectors are cyclical in nature and usually are highly correlated to macro slowdowns.
On the other hand, small caps typically belong to the New Economy. They are operating in sectors such as internet, technology, media, consumption, and services. These are well-supported by social policy change that has been emphasized by top leaders in the past few years. Among the 2,600 stocks listed in Chinese A-shares, 720 will belong in the Small and Medium Enterprise Board, and 380 will belong in ChiNext. Although the valuation of the small cap is relatively higher, its growth potential and earnings momentum is also higher, as we estimate. It all depends on the investor and whether they would like to go for a value approach or growth approach for their investments.
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CSI 300 Index: The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of 300 stocks traded in the Shanghai and Shenzhen (A-Share) stock exchanges. The index is compiled by the China Securities Index Company, Ltd.
ChiNext Index: ChiNext is an index designed to track the performance of the 100 largest and most liquid stocks listed and traded on the Small and Medium Enterprise Board (“SME”) and the ChiNext Board of the Shenzhen Stock Exchange.
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Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Principal risks of investing in China include, but are not limited to, political and economic instability, inflation, confiscatory taxation, nationalization and expropriation, market volatility, illiquidity, currency fluctuation and devaluation, actions taken by the Chinese government in the markets, less reliable financial information, differences in accounting, auditing, and financial standards and requirements from those applicable to U.S. issuers, and uncertainty of implementation of existing Chinese law.
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