Vontobel China New Vision Index – Interview

With the China New Vision Index, Vontobel presents an investment solution that enables investors to participate in the broad universe of China A-shares in an uncomplicated manner.

Yun Bai, Head of Factor Investing Research, in an interview about the Vontobel China New Vision Index.

Why should investors consider building up exposure to the Chinese stock market?

China is the second largest economy in the world and its total market capitalization is the third largest with more than 3’000 companies listed on the Shanghai and Shenzhen stock exchanges. Over the last few decades, China has experienced stable economic growth and the continued development of society. China has made good progress in innovation and technology development and has started to play a leading role in certain areas. We believe that going forward, the Chinese market could offer attractive growth potential. Meanwhile, the market remains relatively local and hence adds an additional diversification benefit to existing portfolios.

However, current exposure to Chinese equities for non-Chinese investors remains low compared to the importance of the market. As China gradually opens up financial markets to foreign investors, the trading restrictions are loosening on equity investments through the Northbound Stock Connect. The market is more accessible to foreign investors than ever before. In return, the increasing connection to international markets strengthens the local market regulation and governance. Therefore, gradually building up exposure to Chinese equities could benefit investors in the long-term. It should however be noted that sanctions and restrictions in other countries could make it more difficult for Chinese companies to take advantage of international growth opportunities, as they are viewed with suspicion in many countries or face obstacles or barriers to investment in response to restrictive Chinese politics.  

What is behind the term China New Vision – Masterplan for the future?

As part of the 14th five-year plan, the government aims to reduce the unemployment rate and raise urbanization to 65% from 60.6% in 2020. China’s leadership hopes to further deliver increased income levels and hence encourage consumption. The new plan also includes goals to improve the overall quality of life, such as a pension system to cover 95% of the population by 2025 (compared to 91% in 2020), and increase the number of years of compulsory schooling. For the development of self-dependent innovation, the goal is to achieve an annual growth rate for research and development spending in this area of at least 7%. Turning to the environment, the fourteenth five-year plan has set out the objective until 2025 to reduce the energy consumption needed to generate one unit of economic output by 13.5% compared to the end of 2020. The same applies in terms of CO₂ emissions, which are to be reduced by 18% in the production of one unit of gross domestic product.

Innovation is an important goal in the five-year plan. But the progress in recent years has already been great. Do you think growth stocks can still offer outperformance?

I would say it is possible that growth stocks also can experience corrections, as we have seen earlier this year, with a cyclical shift to value stocks. However technological innovation will not stop. We need to take a longer-term perspective and also consider the government’s guidance in our valuation metric. For example, since late 2020 we have seen record investments into developing the 3^rd generation of semiconductors, which are backed by the government. With strong central support, we would expect great development progress. Furthermore, domestic society in general provides a friendly environment from both policy and culture perspectives to adopt new technologies. Investors could harvest attractive returns via these highly innovative companies. However, many countries (for example the US and the EU) continue to find it difficult to award international contracts to these Chinese countries, which could slow down international growth in some segments. But, on the other hand, in order to weather through the volatile market conditions and minimize the impact from market corrections, the Chinese New Vision Index holds a rather diversified allocation with a moderate shift towards those attractive industries or sectors. 

As environmental improvements are key to the guideline, how are they reflected in the index?

Due to China’s rapid recent economic growth in the past few years and the accumulated demand from its population, China has had to contend with considerable economic problems. This puts equal strain on the living conditions for the population as well as the national economy as a whole. The New Vision index has three elements related to this factor. Firstly, we exclude companies which have high C02 emission levels, namely the coal, oil and gas industry. Instead, we have allocations in alternative energies, for example solar energy. Secondly, we exclude stocks with a relatively low ESG score.

What are the special characteristics of the Vontobel China New Vision Index?

The China New Vision Index builds on the targets of the Chinese government, i.e. currently the 14^th five-year-plan. It focuses on the basic quality of life and the development of society, which has strong links to innovation, new technology and environmental improvement. We integrate those factors into our systematic equity selection by focusing on high quality companies and companies with high level of innovation. Furthermore, we keep a diversified sector allocation to capture the whole market. Meanwhile, we also integrate ESG elements into our index construction.

Nevertheless, investors should remain aware of the of the significant risks that come with Chinese stocks, which may be strongly affected by possible trade and political conflicts within China as well as in their international activities.