Gaining exposure to growth

Investing in China is more complex than ever, but opportunities still exist.

For several years now, increasing numbers of international investors have been taking an interest in and buying shares in China-based companies, known as A-shares. However, 2020 was a turning point in terms of how this market is perceived. Although China was probably the initial epicentre of Covid-19, it has also been the country showing the first tangible signs of recovery from the crisis. The pandemic was handled in a typically dirigiste manner by the Chinese government, and the benefits of that approach can clearly be seen today.

The financial markets have recognised this, and China was one of the best-performing markets in 2020, with the MSCI China A USD index posting a gain of 43.2%. Although 2021 got off to a more volatile start – including widespread profit-taking in February – it appears that Chinese A-shares are confirming their growth potential this year.

Louis Zanolin

Contact Louis Zanolin, Bonhôte Fund Solutions


There are several factors supporting this analysis. From the epidemiological point of view, China is now better placed than many of its Asian neighbours. China has managed to suppress the virus while keeping its manufacturing sector intact. It has shifted the focus of production away from export markets and towards domestic and regional consumption, and so is now less dependent on Western demand. Finally, and perhaps most importantly, China has been able to do all of this without the huge stimulus plans adopted by the US and European Union, which will have to be paid for one day. Overall, China is emerging from the Covid-19 crisis with an economy in which output is back to prepandemic levels and, most importantly, public finances that are in much better shape than those of most other major economies. In addition, Chinese shares are still trading at much lower valuation multiples than their US counterparts, with an average P/E ratio of 17x for China’s CSI 300 index as opposed to 37x for the S&P 500 index in the US (May 2021). In sector terms, manufacturing, alternative energy (including solar and electric vehicles) and healthcare (more specifically biotech) appear particularly promising.

However, the Chinese A-share market is not easy for foreign investors to navigate. With more than 3,000 companies listed, it is the world’s second-largest market after the US. Only a small number of stocks are covered by financial analysts and reporting takes place in Mandarin. These three factors alone mean that foreign investors need the support of local teams to manage their allocations to Chinese A-class shares.

Two years ago, we partnered with Zhong Ou in order to diversify our exposure to the Chinese market. With almost $90 billion of assets under management, Zhong Ou is one of mainland China’s largest asset managers. We take a value-based approach, with a portfolio focused on stocks and sectors that are exposed to Chinese domestic growth and trade on attractive multiples. This approach is significantly different from that adopted by other, more growth-oriented, A-share funds, and has the benefit of offering full exposure to the Chinese market’s long-term development while smoothing out its large fluctuations.