GDP growth forecasts for 2010 are over four times higher than for Europe and the US combined. We also expect domestic consumption to increase, resulting in further investment opportunities, as the social security system continues to develop on the mainland.
From 1 January 1 1999, through 31 December, 2009, Chinese equity markets significantly outperformed those in the US, UK and Europe, largely due to the growth in China's economic development.
The annualised average return for this period was 15.9 per cent for the Shanghai Composite, 3.3 per cent for DJ Euro, 0.4 per cent for the S&P 500 and 0.4 per cent for the FTSE 100. Historically, China's equity market volatility has been high and this is unlikely to change this year, or in 2011.
Performance of indices from 1 January 1999 to 31 December 1999
Source: Financial Express Analytics
The medium to long-term investment case for Chinese equities is also compelling. In terms of GDP and equity market size, China is among the three largest economies in the world and we believe there is a good chance it will become the second largest, after the US, this year. Despite this, China's weight in MSCI’s global equity market index is low: materially lower than its equity market size and GDP weight. Equity weights should, ideally, correspond to the underlying markets and be reflective of an economy's percentage of the global economy.
Performance of MSCI China vs MSCI BRIC over 1-yr
Source: Financial Express Analytics
The correlation between Chinese and other major equity markets has been relatively low and we believe Chinese markets should be viewed as an independent asset class in terms of global asset allocation.
Given the long-term growth prospects in China, we believe exposure to their equity markets should be increased considerably and reflect the underlying weight of the economy and long-term growth prospects. Over the past two years, we've seen an increase in dedicated China equity interest and allocations from long-term investors such as pension funds, endowments, major family offices and foundations.
To achieve its economic and equity market potential, we believe China must encourage private investment and highlight the long-term sustainability of its economic growth. Domestic consumption needs to be developed as a key driver of GDP and continuing growth will be required in sectors such as water and gas utilities, media/technology and pharmaceutical/healthcare. Last, but by no means least, China must continue to develop a social security system, particularly in its rural areas.
The opinions expressed reflect the personal views of Frank Yao (Portfolio Manager), at Neuberger Berman and are not the opinions of Neuberger Berman and are subject to change without notice.