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China: Too Big to Ignore

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China: Too Big to Ignore China: Too big to ignore Navigating Chinese equities This document is for the exclusive us of investors acting on their own account and categorised either as “eligible counterparties” or “professional clients” within the meaning of markets in financial instruments directive 2014/65/EU. Access Markets February 2020 Access Markets | China: too big to ignore 3 China: too big to ignore Despite being the second biggest market in the world and one of the fastest growing economies, foreign investment in China remains low. As a result of ongoing market liberalisation, inflows from foreign portfolio investors are likely to increase significantly over the next few years, particularly in the A share market. We believe it may be time to consider China as a standalone portfolio allocation. ... is not reflected in China’s huge economy... equity markets #2 US #1 2.3% 330m tn % $21.4tn $21.4tn $34.3 55.6 VS. GDP GDP GDP growth1 Population1 Stock market2 % of MSCI (nominal)1 (at PPP*)1 (free float ACWI3 mkt cap*) #2 #1 China 6.1% 1.4bn ~$3.7tn 4.2% $13.6tn $27.3tn 1Source: IMF, World Economic Outlook, October 2019. *PPP = Purchasing Power Parity 2Source: MSCI, as at 31/12/2019. Data does not include ETFs and ADRs as they do not directly represent companies. Data includes only actively traded, primary securities on the country’s exchange. For China, data corresponds to combined market cap of HK, Shanghai and Shenzhen listings, based on total market capitalisation. (*) MSCI IMI indices. 3Source: Lyxor International Asset Management. Data as of 31/01/2020. Why the discrepancy? Structural impediments have restricted free trading of shares, especially for foreign investors Free float Not tradable Inside ownership Capital markets structure Fragmentation f There is widespread inside ownership f Stock financing comprises only 5% of f Fragmentation also limits access to of Chinese shares Chinese companies’ balance sheets Chinese equities f ~2/3 of Chinese equity value is not f Unlike the US stock market, most f They trade on several exchanges, with available for trading, unlike the US financing comes from bank loans varying levels of availability to foreign stock market and debt investors f The Chinese communist party and f The biggest sources of funding are f The largest segment trades on the other institutional investors hold bank loans and retained earnings mainland as A shares on the Shanghai controlling, permanent stakes in and Shenzhen stock exchanges many firms f Over 80% of onshore trading volume f Index providers include only the free is by individuals (i.e. Chinese retail float of a company’s stock in index investors) weightings Access Markets | China: too big to ignore ETFs are an easy way to access China, but multiple share classes and indices exist, each with their own unique features. This can make for an investment landscape which is complex and hard to navigate. Understanding Chinese equity share classes A Shares B Shares H Shares Red chips P chips Overseas listings f Incorporated in f Incorporated in f Incorporated in f Securities of f Non-government f Incorporated mainland China mainland China mainland China state-controlled owned securities outside mainland f Listed on Shanghai f Listed on f Listed on Hong companies incorporated China or Shenzhen Stock Shanghai (in USD) Kong Stock incorporated outside mainland f Includes ADRs (N Exchanges (in or Shenzhen Exchange (in HKD) outside of China shares listed in RMB) (in HKD) Stock f Heavily weighted mainland China f Listed on HK New York... etc.) f Often non-state Exchanges towards Financials f Listed on Hong Stock Exchange f e.g. Alibaba on owned, from Kong Stock (in HKD) NYSE consumption Exchange (in HKD) f e.g. Tencent driven industries f e.g. China Mobile Red P e.g. A B H chips chips ADRs CCY: RMB CCY: USD, HKD CCY: HKD CCY: HKD CCY: HKD CCY: USD Mainland China exchanges Hong Kong exchange US exchanges Anatomy of the Chinese free float equity market Key index facts f 43 stocks have dual listings on A&H exchanges (17% of the S U overall market capitalisation), mainly financials f B shares represent only a marginal portion of Mainland China ADR equities (19 stocks) 11.7% Red f ~12% of the overall universe is ADR (21 stocks, including 6.5% M Alibaba) a i n l MSCI China a Top 10 constituents A n P chip d All shares IMI 51.3% C Index 16.3% (~$3.7tn, 2998 stocks) h Share i Weight Sector g n Class n a (%) o K g ALIBABA GROUP HLDG ADR ADR 9.64 Cons Disc n o H H TENCENT HOLDINGS LI (CN) P CHIP 7.42 Cons Svcs 14.0% CHINA CONSTRUCTION BANK H A 2.23 Financials B 0.1% PING AN INSIRANCE H H 1.77 Financials KWEICHOW MOUTAI A A 1.72 Cons Staples CHINA MOBILE RED CHIP 1.39 Comm Svcs ICBC H H 1.35 Financials PING AN INSURANCE A A 1.07 Financials BAIDU ADR ADR 0.94 Comm Svcs BANK OF CHINA H H 0.91 Financials Sources: (*) Data based on MSCI China all shares IMI, MSCI, data as at 31/01/2020. 5 Mainstream equity indices digested No. of Onshore or Market Shareclasses stocks Offshore Capitalisation ($bn) Hang Seng (HSI) 50 Offshore HK Ordinary, H Shares, Red Chips 2,359 Hang Seng China Enterprise 50 Offshore H Shares 1,716 (HSCEI) FTSE China 50 50 Offshore H Shares, Red Chips and P Chips 1,291 FTSE China A 50 50 Onshore A Shares 858 CSI 300 300 Onshore A Shares 1,980 A Shares listed on the Shanghai and MSCI China A Onshore 537 Onshore 2,124 Shenzhen indices A Shares under scenario of full integration into MSCI China A International 407 Onshore 1,282 MSCI EM A Shares which are included in MSCI MSCI China A Inclusion 234 Onshore 1,244 Emerging Markets Index A Shares which are listed on the Shanghai MSCI China A 378 Onshore and Shenzhen indices accessible through 1,244 Stock Connect H Shares, B Shares, Red Chips, P Chips, MSCI China 459 Both 2,132 ADRs and 5% float adjust A Shares Source: MSCI, FTSE, Hang Seng Indexes, China Securities Index Company, Bloomberg, data as at 31/12/2019. MSCI China f The strategic benchmark for Chinese equity allocation, integrating the full opportunity set and the building blocks of MSCI Emerging Markets & MSCI ACWI Alphabet soup of share classes H-shares (24.4%) Red-chips (10.7%) A-shares (18.0%) MSCI CHINA B P-chips (~$2.1tn, (0.1%) (26.6%) 703 stocks)* ADR (20.03%) All share classes are now included, incl. A Shares 1Source: MSCI, data based on index weights – for illustrative purposes only, data as at 28/01/2020, *data as at 31/12/2019. Access Markets | China: too big to ignore MSCI China offers the greatest exposure to Tech disruptors f Financials are a major part of H-Share indices f Communication services’ heaviest weighting is in the MSCI China Sector compositions differ across indices China’s BAT* = FAAMG of China** MSCI FTSE MSCI MSCI MSCI Market Cap. CSI 300 HSCEI China A China A China A Company Region China China A (USD bn – Jan 20) Int. 50 Onshore Cons. Disc. 26.9 10.3 6.6 6.1 6.6 1.2 8.4 1 Apple USA 1,393 2 Microsoft USA 1,262 Cons. 3.8 12.1 14.2 2.6 14.1 25.7 11.6 Staples 3 Alphabet USA 1,001 Energy 3.5 2.1 2.3 - 2.4 1.2 1.8 4 Amazon USA 919 5 Facebook USA 621 Financials 20.5 38 26.5 46.4 26 56.3 26.9 6 Alibaba China 564 Healthcare 3.9 7.2 8.6 3.4 8.4 3.8 7.9 7 Tencent China 461 Industrials 5.7 11.3 12.8 2.7 12.8 7.7 12.1 8 Ebay + Paypal USA 166 9 Netflix USA 153 Inf. Tech 4.2 8.2 11.2 - 11.7 1.6 13.4 10 Salesforce USA 162 Materials 2.4 6.5 8 1.2 8.1 0.6 8.7 11 Booking holdings USA 60 Real Estate 5.7 - 4.5 7.3 4.6 - 4.7 12 Meituan Dianping China 76 13 Uber USA 63 Com. Serv. 20.8 2 2.5 18.3 2.6 0.7 2.3 14 JD.com China 56 Utilities 2.6 2.4 2.7 3.7 2.8 1.2 2.1 15 Baidu China 44 *BAT: Baidu, Alibaba, Tencent - ** FAAMG: Facebook, Amazon, Apple, Microsoft, Google. Source: MSCI, FTSE, Hang Seng Indexes, China Securities Index Company. Data as at end December 2019, ** sector here refers to Telecom Svcs., weightings may not add up due to rounding, Internet trends 2018 by Mary Meeker, data updated as at 28/01/2020 Exposure Trading currencies Replication type AuM1 TER* Lyxor MSCI China Broad Chinese equities USD, EUR Indirect €58m 0.30% Lyxor China Enterprise (HSCEI) Offshore H Shares USD, EUR, GBP Indirect €628m 0.65% Lyxor Hwabao WP MSCI China A (DR) Onshore A Shares USD, EUR, GBP Direct €33m 0.35%* Why choose Lyxor’s Chinese ETFs Low cost Accomplished Dependable The cheapest Chinese €710m+ in assets 13+ years of experience equity ETF at 0.30% TER1 under management1 managing China ETFs1 1Source for all data unless otherwise indicated: Lyxor international Asset Management, Bloomberg, data as at 29/01/2020. *TER correct as of 29/01/2020. Knowing your risk It is important for potential investors to evaluate the risks described below Underlying risk and in the fund prospectus on our website www.lyxoretf.com The Underlying index of a Lyxor ETF may be complex and volatile.
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