There is a case for a standalone allocation to Chinese equities, as part of a well-balanced portfolio, given that market's vast opportunity set, according to the head of the Greater China Equities team at BNP Paribas Asset Management, David Choa.
The major China indices and Asian indices that include China, include the big successful companies but could miss some of the smaller up-and-coming firms which can only be drawn out by a specialist approach.
"So, [if] we really want exposure to China, we should not only look at the rear-view mirror, looking at what has been doing well, but we should also look forward and see what could be the next newcomer that will be doing great - upgrading from an okay company to a great company... you can only do that for a standalone allocation in China," Choa says.
China also accounts for 18 per cent of global gross domestic product and 11 per cent of global equity market capitalisation. And Choa says that despite recent concern around the government's crackdown on private companies, there are still plenty of opportunities there.
The new paradigm
In terms of seeking out new opportunities, investors need to understand that the Chinese consumer has moved beyond buying things and is looking for opportunities and a certain lifestyle. The newly affluent middle class, whose spending habits have been watched liked a hawk the world over, are now looking to spend their wealth on experiences, rather than things, according to Choa.
"Chinese consumers want [an] upgrade in their lifestyle [it's about] experience-based consumption...entertainment, food consumption," Choa says.
Choa says China is currently going through a transitional period.
"I think people need some time, I think globally, to understand what the Chinese government is trying to achieve, through the regulation and tightening of the property sector ... actually what they're doing is not trying to kill the private sectors, but they are trying to proactively de-risk the system such that the economy can grow more steadily for the longer term," he says.
In such an environment there is an opportunity for investors that have a close understanding of the Chinese economy to seek out the opportunities, while other investors depart.
A different approach
Choa uses the example of software companies that service the property sector as one area where there might be opportunities.
"[If] it is so hard going forward to sell property, wouldn't it mean that property and construction companies, they need to be more precise in their selling efforts, they need to control their costs more efficiently, which means that actually, they will need more tools, like software, to help them to achieve that."
The next six months might still be volatile but Choa is optimistic that the outlook for Chinese equities over the next three to four years is good.
"[The international investor] also needs time to observe the government actions. And to build confidence, again, on the asset class, to understand that actually, what the government is doing is not is not about specific regulations or a specific sector, they are playing a much bigger picture...to try to de-risk the system so the system can grow, steadily for the longer term," he says.
"And lastly, despite all the regulation we talked about, actually, what is not being talked about is China is also proactively opening up the capital market, attracting the foreign capital and making it easier to invest in the market."
BNP Paribas Asset Management Australia recently opened up its China Equities Fund to Australian investors.