The importance of global diversification has been magnified during the current worldwide pandemic. South African long-term investors need to align their offshore strategy with their investment goals. The JSE represents less than one percent of the global GDP and investors looking for international equity exposure need to do so in a manner that helps diversify risk through investments in companies and industries not offered on the JSE.
Traditionally, South African investors have opted to invest in so-called developed markets when taking money offshore - mainly the US and Europe. Both geographies offer a range of companies to invest in and allow investors to own assets in hard currency. But by focusing on the west, investors have missed out on a very important market.
China as an investment destination
China is the world's largest emerging market and the second-largest economy in the world. The country continues to evolve from an export-driven economy to one of domestic consumption. The sheer size of its population makes it an attractive investment destination, especially in industries like technology, healthcare and luxury goods.
The country has demonstrated its ability to drive economic growth with further uplift expected from increased infrastructure spend, policy reform, global competitiveness, a large and increasingly educated workforce and export-friendly policies. Overlaying these prospects with ever-increasing consumer demand, due to a rising middle class, creates a promising investment opportunity.
China is the second-largest recipient of foreign direct investment (FDI) capital in the world and this is usually a sign of investor confidence in a region. In 2019 China received $137 billion in FDI.
MSCI China versus MSCI World Index
Source: Bloomberg
Investor regulations have been revised over the past decade, making it easier and more appealing for foreigners to invest. This has led to the inclusion of China A shares in MSCI emerging market indices, giving them greater visibility.
Total return
Source: Bloomberg, 27 July 2020
* Annualised
Although the Chinese market is also an emerging market, it does not always move in line with most emerging markets, which provides diversification benefit.
Correlation of JSE All Share Index with a selection of other indices
Source: Bloomberg, FNB Wealth and Investments
Investing in China is, however, not without risks. The region has been criticised for selective disclosure on various issues as well as regulatory differences from the west. In addition, Chinese companies adhere to their own accounting policies, which differ from GAAP. Many of China's blue-chip companies are listed on foreign stock exchanges too, which would hold them to their own regulatory standards.
China's growth into an economic superpower has opened it up to criticism and geopolitical risk. The trade war between China and the US and a recent dispute between China and India will likely continue to dominate news flow over the medium term.
How to access the Chinese market
Foreign investment allowances
From a regulatory perspective, South Africans have broad access to the international markets but there are certain limits thereto. South African resident individuals, 18 years and older, looking to invest offshore may use all or part of the following annual allowances:
Investors gaining access to Chinese markets through a local unit trust or local ETF will not utilise any of their offshore allowance in doing so.
The Chinese market has rallied over the past two months, following a similar pattern to the US recovery. In this time South African investors with exposure to China would have balanced local share pullbacks with high Chinese growth. While it is always difficult to time entry points and investments, heightened event risk may provide investors with opportunities to enter the Chinese market at lower levels in the near future.
