Are Chinese Onshore Equities An Under-Appreciated Diversifier

Diversification has been tough of late with bonds and equities exhibiting co-integration. So the search is on for asset classes that can solve this problem. The research being performed inside RFPnetworks is not necessarily about mean-variance optimisation. It's focused on qualitative causality. Why is one asset class uncorrelated with the current portfolio basket. These insights are pulling investors towards the Chinese Equity onshore market as an underappreciated diversifier.

Perceptions on Chinese Equities are changing, albeit slowly. Accessibility barriers have lifted over the past 20 years: Starting with China joining the World Trade Organisation in 2001; introducing Qualified Foreign Institutional Investor (QFII) quotas; and the launch of Stock Connect.

But the fact remains that European and Western institutional investors portfolios are still significantly underweight China. Whether you look at this in terms of global market size, index representation, or on a World GDP or population share basis.

This could be a missed opportunity given cross-asset correlations today. Unlike U.S., European or some other Asian Equity markets, China's onshore equity market is not purely a play on global growth. This was the widely accepted view, but the reality today may be different.

Many of the underlying drivers of the Chinese onshore equity market are domestic and not global. Which is leading investor to acknowledge this causality as a potential portfolio diversifier. But most asset managers do not cover all of the constituents of the USD 7 trillion Chinese A-Share market. They lack a local research hub and analysts. So finding a manager that can build a Chinese Equity Onshore portfolio that is de-correlated from the global economy requires a customised solution and smarter sourcing across across this highly specialised investment manager universe.