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China: An Investment Opportunity Too Big To Ignore

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Since the implementation of the initial Open Door Policy in 1978, China has experienced rapid development—making it the world’s second largest economy in nominal terms.

In the next year, the country will move into the next phase of opening up its economy by lifting restrictions on the foreign ownership of securities, insurance, and fund management firms, and this will make the economy more accessible to the outside world than ever before.

An Opportunity Too Big To Ignore

Today’s infographic from BlackRock explores the steps China’s markets have taken to attract foreign capital on a global scale.

China’s moves are funding the nation’s next stage of growth, and are also creating new investment opportunities for foreign investors.

china investment opportunity

The China Investment Opportunity

Currently, foreign investors hold just 3% of total Chinese securities, despite the country having the world’s second largest stock and bond market globally.

As the onshore equity and fixed income markets open up, investors have the opportunity to gain exposure to more sectors, particularly those that focus on the domestic economy.

China’s large consumption base of 1.3 billion consumers is a powerful engine of growth, with consumer spending increasing to $4.7 trillion in 2017, from $3.2 trillion in 2012.

Ensuring Sustainable Growth

There are structural reform gaps that need to be addressed in order to ensure China’s growth is sustainable.

These reforms, which seek to correct imbalances caused by uneven economic growth, cover many areas of the economy. They affect the government, as well as corporate, financial and household sectors.

Some of these key reforms include:

  • Capital reallocation: Debt reduction and interest rate liberalisation
  • Income redistribution: Property, household and corporate tax reduction
  • Market regulation: Supply-side reform and environmental protection
  • Institutional framework: Intellectual property protection, and reformation of the hukou— China’s registration program, which serves to regulate population distribution and rural-to-urban migration

With 22 reforms currently in progress, the long-term impact is expected to be tremendously positive for growth.

Opening Up the Great Wall

China has shown great support for economic globalisation, and has already been making strides to open its markets to the rest of the world.

  • 2002: Qualified Foreign Institutional Investor (QFII) scheme launches
  • 2011: Renminbi Qualified Foreign Institutional Investor (RQFII) scheme launches
  • 2014: Shanghai/Hong Kong Stock Connect launches
  • 2016: Shenzhen/Hong Kong Stock Connect launches
  • 2017: Bond Connect scheme launches
  • 2018: MSCI announces 20% inclusion factor of A-shares
  • 2019: Bloomberg Barclays Global Aggregate Index begins including yuan-denominated bonds
  • 2020: JPMorgan Chase & Co. plans to add Chinese government debt to index

These index inclusions will result in a substantial inflow of new investor funds. According to Goldman Sachs, Bloomberg’s decision to increase the weighting of Renminbi-denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index could attract between $120-$150 billion in new investments into Chinese debt markets.

New China vs. Old China

China has transformed from an export-driven and rural country, into a global manufacturing and technology superpower.

Foreign direct investment (FDI) inflows into China’s tech sector have been rising significantly, and currently account for almost a third of total FDI.

China already has the world’s largest robot market, and the government is actively promoting the robotics industry with tax reductions and special R&D funding.

—Victoria Mio, CIO Chinese Equities, Robeco

China’s ambitious “Made in China 2025” ten year plan will lower its dependency on imported technology and make China a dominant player in global technology manufacturing.

An Economic Force To Be Reckoned With

China will inevitably face challenges as it proceeds to lead global economic growth. However, its changing economy is creating a new landscape of opportunity for potential growth, and may continue to do so for the coming years.

The continuous expansion of market access, combined with new policies that promote foreign investment, have helped improve investor confidence. If foreign investors exclude China from their portfolio, they risk missing out on the huge potential of this rapidly expanding market.

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Investor Education

Fact Check: The Truth Behind Five ESG Myths

ESG investing continues to break fund inflow records. In this infographic, we unpack five common ESG myths.

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ESG Myths

Fact Check: The Truth Behind 5 ESG Myths

In 2021, investors continue to embrace environmental, social, and governance (ESG) investments at record levels.

In the first quarter of 2021, global ESG fund inflows outpaced the last four consecutive quarters, reaching $2 trillion. But while ESG gains rapid momentum, the CFA Institute shows that 33% of professional investors surveyed feel they have insufficient knowledge for considering ESG issues.

To help investors understand this growing trend, this infographic from MSCI helps provide a fact check on five common ESG myths.

1. “ESG Comes at the Expense of Investment Performance”

Fact Check: Not necessarily

Worldwide, ESG-focused companies have not only seen higher returns, but stronger earnings growth and dividends.

Returns by ESG RatingsEarnings Growth*Active Return**Dividends and Buybacks
Top tier2.89%1.31%0.28%
Middle tier1.35%0.12%-0.02%
Bottom tier-9.22%-1.25%-0.05%

Source: MSCI ESG Research LLC (Dec, 2020)
*Contribution of earnings growth and dividends/buybacks to active return
**Active return is the additional gain or loss compared to it respective benchmark

In fact, a separate study from the CFA Institute shows that 35% of investment professionals invest in ESG to improve their financial returns.

2. “Investors Talk About ESG But Don’t Invest In It”

Fact Check: False

Global ESG assets under management (AUM) in ETFs have grown from $6 billion in 2015 to $150 billion in 2020. In just five years, ESG AUM have accelerated 25 times.

Today, money managers are focusing on the following top five issues:

Top ESG IssuesAssets AffectedGrowth in Assets Affected (2018-2020)
Climate change / carbon emissions $4.18T39%
Anti-corruption$2.44T10%
Board issues$2.39T66%
Sustainable natural resources / agriculture$2.38T81%
Executive pay$2.22T122%

Source: US SIF Foundation (Nov, 2020)

Meanwhile, over 1,500 shareholder resolutions focused on ESG-related matters were filed between 2018-2020. Not only are investors turning to ESG assets, but they are placing higher demands on corporate responsibility.

3. “ESG Investment Strategies Eliminate Entire Sectors”

Fact Check: Not necessarily

First, not all ESG investment approaches are exclusionary.

For instance, in North America roughly 51% of ESG ETFs used an ESG integration approach as of Dec. 31, 2020. In an ESG integration approach, ESG risks and opportunities are analyzed with the goal to support long-term returns.

By comparison, values and screens approaches, which accounted for over 22% of ESG ETFs in North America may screen out specific business activities, such as alcohol or tobacco, or sectors such as oil & gas.

Percentage of ESG TypeIntegrationValues & ScreensThematicImpact
North America50.9%22.5%20.7%5.9%
Asia57.8%34.6%3.8%3.8%
Europe30.8%60.6%8.6%0.0%
Australia28.6%71.4%0.0%0.0%

Source: Refinitiv/Lipper and MSCI ESG Research LLC as of Dec 31, 2020 (MSCI Feb, 2021)

Second, companies are assessed on a sector-specific basis where ESG leaders and laggards are identified within each sector in comparison to peers. In other words, ESG doesn’t mean eliminating exposure to entire sectors. Instead, investors can choose from a range of companies based on their ESG ratings quality.

4. “ESG Investing Is Only For Millennials”

Fact Check: False

Although ESG is popular among millennials, ESG investing is being driven by the entire investor population. In 2019, one study finds that 85% of the general population expressed interest in ESG investing.

Interest in Sustainable InvestingGeneral PopulationMillennials
201985%95%
201571%84%

Source: US SIF Foundation (Nov, 2020)

Sustainable investing goes far beyond millennials—ESG disclosures are quickly becoming requirements for key industry participants, such as institutional investors and listed companies.

5. “ESG Investing is Here to Stay”

Fact Check: True

Climbing 28% in 2020 alone, over 3,000 signatories have committed to the UN Principles of Responsible Investment. As of the first quarter of 2021, 313 global organizations and 33 asset owners have been newly added.

Growth of UN PRINumber of Signatories*AUM Represented
20203,038$103.4T
20192,370$86.3T

Source: UN PRI
*As of Mar, 2020

Central to ESG’s growth is the availability of ESG investments. ESG investing has become more widely accessible—which wasn’t always the case. Over the last decade, the global number of ESG ETFs has grown from 46 to 497.

Why the Facts Matter

As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact.

Given the recent momentum in investment returns and ESG adoption, data-driven evidence empowers investors to build more sustainable portfolios that better align with their investment objectives.

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Investor Education

ESG Investing: Finding Your Motivation

New research around ESG investing highlights that there are three common motivators for investors to invest in ESG assets.

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ESG Investing: Finding Your Motivation

Environmental, social, and governance (ESG) factors are a set of criteria that can be used to rate companies alongside traditional financial metrics.

Awareness around this practice has risen substantially in recent years, but how can investors determine if it’s a good fit for their portfolio?

To answer this question, MSCI has identified three common motivations for using ESG in one’s portfolio, which have been outlined in the graphic above.

The Three Motivators

According to this research, the three primary motivations for ESG investing are defined as ESG integration, incorporating personal values, and making a positive impact.

These goals are not mutually exclusive, though, and an investor may relate to more than just one.

#1: ESG Integration

This motivation refers to investors who believe that using ESG can improve their portfolio’s long-term results. One way this can be achieved is by investing in companies that have the strongest environmental, social, and governance practices within their industry.

These companies are referred to as “ESG leaders”, while companies at the opposite end of the scale are known as “ESG laggards”. From a social perspective, an ESG leader could be a firm that promotes diversity and inclusion, while an ESG laggard could be a company with a history of labor strikes.

To show how ESG integration may lead to better long-term results, we’ve compared the performance of the MSCI ACWI ESG Leaders Index with its standard counterpart, the MSCI ACWI Index, which represents the full opportunity set of large- and mid-cap stocks across developed and emerging markets.

ESG integration

The MSCI ACWI ESG Leaders Index targets companies that have the highest ESG rated performance in each sector of its standard counterpart. The result is an index with a smaller number of underlying companies (1,170 versus 2,982), and a relative outperformance of 7.9% over 156 months.

#2: Incorporating Personal Values

ESG investing is also a powerful tool for investors who wish to align their financial decisions with their personal values. This can be achieved through the use of negative screens, which identify and exclude companies that have exposure to specific ESG issues.

To see how this works, we’ve illustrated the differences between the MSCI World ESG Screened Index and its standard counterpart, the MSCI World Index.

ESG screening

The MSCI World ESG Screened Index excludes companies that are associated with controversial weapons, tobacco, fossil fuels, and those that are not in compliance with the UN Global Compact. The UN Global Compact is a corporate sustainability initiative that focuses on issues such as human rights and corruption.

#3: Making a Positive Impact

The third motivation for using ESG is the desire to make a positive impact through one’s investments. Also known as impact investing, this practice enables investors to merge financial gains with environmental or social progress.

Investors have a variety of tools to help them in this regard, such as the MSCI Women’s Leadership Index, which tracks companies that exhibit a commitment towards gender diversity. Green bonds, bonds that are issued to raise money for environmental projects, are another option for investors looking to drive positive change.

ESG Investing For All

With various angles to approach it from, ESG investing is likely to appeal to a majority of investors. In fact, a 2019 survey found that 84% of U.S. investors want the ability to tailor their investments to their values. Likewise, 86% of them believe that companies with strong ESG practices may be more profitable.

Results like these underscore the high demand that U.S. investors have for ESG investing—between 2018 and 2020, ESG-related assets grew 42% to reach $17 trillion, and now represent 33% of total U.S. assets under management.

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