Trends with Benefits #25: The China Conundrum with Carlos Diez

In the 25^th episode of Trends with Benefits, I speak with Carlos Diez, CEO of MarketGrader about investing in China, which has had one of the most resilient stock markets in the world this year, navigating the trade war, geopolitics and finding equity growth leaders.

The China Conundrum

China is a megatrend and has been for a while. Market liberalization efforts, over the last few years, have helped China’s local markets become more accessible to foreign investors. In 2018, MSCI began adding China’s local market A-shares to their indices, representing a huge acknowledgement of the progress China has made in the development of their capital markets. However, China still represented approximately a third of broad based emerging market indices just from shares listed outside of the country. Now, with the inclusion of A-shares, it surpassed 40%. This may be an appropriate exposure if you consider investing in markets solely based on market capitalization. This approach, however, may crowd out other areas of emerging markets with growth potential such as India or Vietnam, which is on watch to be promoted from frontier market to emerging market status by major index providers.

With the continued ascendancy of the world’s second largest economy, investors are faced with decisions about their allocation to China. Considerations include China’s weight in broad indices, navigating a market that is transitioning from an industrial, “old economy”, with many state-owned entities to a more service-oriented, “new economy”. In addition to local market dynamics are extra layers of complexity from geopolitical theater, including the ongoing trade war with the U.S. and legislation in the U.S. that could see Chinese companies get delisted from U.S. stock exchanges.

So, does it still make sense to allocate to China? And, if so, how? Carlos has been visiting and researching China for years and as you probably guessed, he has a view. He also has an approach to navigating the Chinese markets to identify the real growth leaders.