Ride the ‘Red Dragon’ through Greater China


China’s capital markets have transformed and evolved over the past three decades. Chinese state-owned corporations are now listed on onshore and offshore stock exchanges and Chinese entrepreneurs continue to look to float their companies in Hong Kong or in the US.

Under the Greater China concept, investors can invest in Chinese equities listed in Chinese and non-Chinese exchanges.

All A-shares, H-shares, S-chips, US-listed American depositary receipts (ADRs) and Taiwanese equities fall under the category of Greater China.

The MSCI Golden Dragon Index tracks the Greater Chinese equity markets of China, Hong Kong, Taiwan and others. It also includes large-cap A-shares from the onshore market.

With Taiwan and Hong Kong in the picture, investors exposed to Greater China could capture not just opportunities within mainland China, but the many exciting opportunities across East Asia on a regional basis.

The economies of East Asia are generally intertwined and constitute part of the global supply chain of multinational corporations, enabling investors to ride on regional growth or a Chinese secular trend (such as growing consumption from increasing Chinese affluence).

Greater China comprises more than half of the MSCI Asia ex-Japan Index. Although equity market valuations reached attractive levels late last year and early January, they have since rebounded and are close to where they were during the summer of 2018.

Buoyed by optimism of a Sino-US trade deal and expectations of an easier monetary policy stance by the US central bank, Chinese equities — particularly the onshore market — have rallied strongly year-to-date.

The offshore equity market and Taiwanese equities have trailed, but performed decently thus far. We believe there is still room to go higher.

Valuations as a whole are also not demanding at this current juncture. The MSCI Golden Dragon Index currently trades at 12.9 times 2019’s estimated earnings, which is reasonable compared to where it was for most of 2017 and early 2018.

On a price-to-book (PB) basis, the index trades at 1.6 times book value, which is fairly close to its average since January 2010. The PB ratio has also bounced off levels that were below one standard deviation from its historical average back in late 2018.

The valuation rebound since the start of this year is clearly the strongest in the Chinese onshore equity market. The offshore counterparts are trading at compelling levels relative to what we deem to be fair. As a whole, the different markets are still attractive, as gauged from their forward price-earnings ratios.

There are many ways to ride the “Red Dragon” such as via sectors (insurers, healthcare) or single companies (like BYD Co and Tencent Holdings Ltd).

For investors who prefer a more diversified approach, going for the Greater China equity funds is also a viable option.

In this case, Greater China is treated as a core position within a portfolio since it comprises a large part of the Asia ex-Japan equity markets.