• ETF Insights

    Three Rules for Investing in Tomorrow’s China

    Martijn Rozemuller, CEO – Europe
     

    It’s one of the basic truths of investing that you must always think ahead rather than look back. After all, if nothing else investing is about discounting the future.

    That’s why many clever investors are upping their investment in China, putting it at the core of their portfolios. Very simply, the country is the fastest-growing major economy in the world, with some of its most dynamic businesses.

    Looked at objectively, one big gap shows why they find China so compelling. While the Chinese economy now accounts for 16% of global GDP, one large global stock market index only weights it at 5%.1Logically, that suggests China stocks should rise as the gap closes.

    Figure 1 - Share projection of Global GDP2

    Share projection of Global GDP

    Source: World Bank World Development Indicators for 2020 GDP data, OECD Long-term baseline projections, No. 103 for 2040 GDP projections.

    But China is changing fast so you can’t invest blindly. Its brand of state-led capitalism has been the success story of our time, with long-term benefits for investors, but it has brought some volatility along the way.

    Three ways to be selective

    For this reason, in my opinion you need to take a different approach to investing in tomorrow’s China. We follow three broad rules.

    • Focus on the consumer
      China’s growth is all about the rise of the country’s middle classes. With a population of 1.4 billion, the middle class doesn’t have to expand that much to unleash huge consumer spending. What’s more, the Chinese are ageing fast . So, it’s natural for now to focus on stocks in the consumer discretionary, consumer staples, healthcare and tech sectors.
    • Prioritise financial quality
      That said, not all companies within these areas will capture the growth opportunities of tomorrow. So, you need to spot the highest quality growth companies, trading at reasonable valuations. To do so, you need to analyse the best in terms of four specialist stock selection metrics: growth, value, profitability and cashflow.
    • Don’t forget sustainability
      Lastly, sustainability is important in China, just as everywhere else. The difference is that while some Chinese companies are leaders in focusing on environmentally sustainable resources in their industries like car batteries or solar panels, others still have questionable social practices or governance. So, you want to be selective.

    Time doesn’t come round again

    All of this means that investing profitably in China takes specialist expertise. The country has enormous potential, but you need to invest in the best companies with the best sustainability credentials.

    Our VanEck Vectors™ New China ESG UCITS ETF selects its holdings after intense financial and sustainability analysis.

    Its approach reminds me of a Chinese proverb that says ‘don’t miss opportunities: time doesn’t come round again.’ China’s catch up with developed economies might just be one of those opportunities – but taking advantage of it requires a distinct approach.

    1MSCI World.

    2In constant 2010 US$

    VanEck Asset Management B.V., the management company of VanEck Vectors™ New China ESG UCITS ETF (the "ETF"), a sub-fund of VanEck VectorsTM UCITS ETFs plc, a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland and tracks an equity index. The value of the ETF’s assets may fluctuate heavily as a result of the investment strategy. If the underlying index falls in value, the ETF will also lose value.

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