Key insights from Rayliant Global Advisors' Phillip Wool's speech at the recent EqualOcean event.
Investing in China is nothing new, but ways of investing aren't invariable. China, opening its investment frontier in unprecedented ways, requires global investors to adjust their portfolios nimbly in order to win in this constantly moving market.
On December 9-10, 2021, EqualOcean hosted the World Innovators Meet 2021 (WIM2021) conference. Phillip Wool gave a speech on building a China portfolio amid global uncertainty. For Phillip, localized quantitative investing in China can generate more alpha opportunities.
Phillip Wool, PhD is a Managing Director and Head of Investment Solutions at Rayliant Global Advisors, a quantitative asset manager focused on generating alpha from investing in China and other emerging markets. Prior to joining Rayliant, Phillip was an assistant professor of Finance at the State University of New York in Buffalo, where he pursued research on quantitative trading strategies and investor behavior and taught investment management. Phillip earned his PhD in finance from UCLA.
When investors decide to allocate money to China, Wool suggests three questions should be pondered: Should they get onshore or offshore exposure? Should they adopt passive or active approaches? Should they apply more global or more localized strategies?
The selection between onshore or offshore Chinese shares is often connected with investing in emerging markets. For those who want to enjoy the wealth increase brought by emerging markets, Chinese stocks are deemed to be necessary to consider. It's a common approach for investors to select an emerging country ETF to cover Chinese stocks that have chosen to list worldwide in the US, Hong Kong, Singapore and certainly China's mainland.
But most investors may neglect the importance of weights of ETFs. Take iShares MSCI Emerging Markets ETF (EEM) as an example: attaining only 5% exposure to China's A-shares stops investors from enjoying the benefits of the Asian nation's high GDP growth. China's A-shares saw 8.9% in annual GDP growth and 14% in EPS growth from 2005 to 2019. By contrast, emerging countries only grew by 3.4% and 1.7% on average. Thus, scrupulous investors should adjust their China exposure strategies to take advantage of China's exuberance.
Another key consideration of selecting onshore or offshore stocks is risk diversification. Apart from investment in emerging markets, investors put major stakes in developed markets like the US. So, it's wise to allocate eggs in different baskets. In other words, a new portfolio with a low correlation with a portfolio full of US stocks would appear attractive. And China's A-shares are a perfect candidate. Based on Rayliant Research, the onshore Chinese share market is 0.39 correlated with the US stock market. On the other hand, the coefficient of correlation between the offshore market and the US market is 0.62.
Except for correlation research, Rayliant's findings show that emerging markets' trading patterns are different from the developed world's. Like that of many other EM countries, China's A-share market is filled with retail investors. According to Rayliant Research, it generated about 5% excess return, significantly exceeding the rest of EMs' 4.2% from July 2000 to December 2019.
But can a global quantitative strategy work in China's A-share market? The answer is no. Mr. Wool provided several reasons. First of all, state-owned enterprises (SOEs) constitute around half of the total A-share market capitalization, and they may not always maximize shareholders' equity. China has a different investor demographic, nuances in the legal environment, different accounting standards and so on. Mr. Wool believes a tailored quantitative approach is the best solution to all these challenges.
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As a part of WIM2021, China & The World Summit was hosted on December 9-10, 2021. It was focusing on the world's second-largest economy's global impact and interaction with the rest of the world.
WIM 2021 China & The World Summit is built around two major topics:
Ⅰ. Investing in China: Seeking value amid global turbulence.
Over the past decade, China has been an attractive investment destination. But will it remain one in years to come? WIM 2021 gathered global investors, senior executives, and market participants to discuss this and other questions concerning the world's second-largest economy's past, present and future.
Ⅱ. Localization & Globalization: Global enterprises' 'China story' and Chinese companies' global expansion.
China's role in the global economy has been continuously changing. As the country's market matures, the world's largest enterprises have been venturing into it – with varied success. Meanwhile, Chinese new-economy companies are also expanding their presence in foreign markets. At WIM 2021, a number of eminent experts and industry insiders discussed the most important trends and narratives at the interface of China and the rest of the world.
Follow EqualOcean.com and stay tuned for other WIM recap articles!
WIM2021 'Digital Reshaping the World' will be hosted offline in Shanghai and New York while broadcasting globally. The event covers 11 topics, including the hottest industries (from automotive to healthcare) and concepts (like Carbon Neutrality and 'Zhuan Jing Te Xin').
World Innovators Meet (WIM) is a yearly flagship event hosted by EqualOcean for the past 6 years. It is a time where international delegates gather to discuss hot button topics in China's key industries.
We see innovation as the biggest driving force to building a better world. Hence, through WIM we seek to create a platform for global innovators to connect. By uniting bright minds, we seek to foster learning, inspiration and wonder – and inspire conversations that matter.
In a short span of 6 years, WIM has grown from a local event in China to a global event that bridges the world and China by bringing together 1,500+ international speakers (including several Nobel laureates), 50,000 global attendees, and 2,000+ media and community partners.