This article is written in collaboration with FSMOne.com. Views expressed in the article are the independent opinion of DollarsAndSense.sg.
When it comes to thematic investing, many Singapore investors are naturally drawn towards the idea of capturing growth potential from China. At its root, gaining exposure to China is important for one simple reason – China’s rise as an economic superpower in the world.
Led by rapid urbanisation of the world’s largest population over the past generation, China’s economy has grown over 6.2% every year in the past 30 years. This has also underpinned its importance in the global economy, becoming the 2nd largest economy in the world and the country is predicted to overtake the U.S. economy at some point in 2020.
Whether this happens or not, what we know for sure is that China has managed to urbanise its population, and will continue to focus on this strategy. While this initially created lower-skilled jobs for its masses, large pockets of the population have already started making the leap to be at the forefront of many sectors, including construction, healthcare and technology.
As China grows into its superpower status, its people will be lifted into affluence and its companies will be able to tap on sustained growth across diverse sectors within the country as well as increasingly expand its market share overseas.
While the prospects of investing in China can be an exciting and lucrative one, many Singapore investors may still think it is complex to tap into China’s growth. Here’s 4 different ways investors can start adding exposure to China in our investment portfolio.
# 1 Investing Directly In Chinese Companies Through Offshore Exchanges
The simplest way we can increase our exposure to China is by investing in Chinese companies. While foreigners can invest directly in China-listed shares (or A-Shares), there may be some limitations such as having to do so through a broker offering access to the Hong Kong Exchange (HKeX) Stock Connect, and even then, there may be a limited number of securities we trade as well as a daily trading volume quota in the system.
Nevertheless, we can still gain exposure to some of the largest and most well-known Chinese companies are listed in the U.S and other offshore exchanges.
On the New York Stock Exchange (NYSE), we can invest in Alibaba Group, an e-commerce behemoth, which also owns complementary businesses in cloud computing and logistics, and China Mobile, one of the largest telecom companies in the world. On NASDAQ, we can invest in Baidu, China’s largest search engine, JD.com, the biggest online retailer in China, and Pinduoduo, a fast-growing social commerce platform.
We can also invest in bluechip Chinese companies listed in Hong Kong, including Tencent, a social media and online gaming giant, and phonemaker, Xiaomi. The Hong Kong Exchange is also home to many other traditional Chinese companies in the property and financial sector. Some household names include, Country Garden and China Evergrande, as well as Bank of China, China Construction Bank and Ping An Insurance.
There are also China companies listed in Singapore that investors can buy on the Singapore Exchange (SGX). They include Yangzijiang Shipbuilding, Yanlord Group, and even REITs such as Sasseur REIT and BHG Retail REIT.
Regardless of whether you are investing in a Chinese company listed on the SGX, or in an overseas stock exchange, you can make your investment via the FSMOne’s brokerage platform.
# 2 Investing Through ETFs
Another way we can gain exposure to China’s economy is to invest in the right exchange traded funds (ETFs).
Similar to individual stocks, ETFs are listed on stock exchanges including those that we are familiar with such as the U.S., Hong Kong and Singapore.
On FSMOne’s ETF Search tool, we can simply input the search term “China”, to see a comprehensive list of China-focused ETFs we can invest in. This is a quick way to find and shortlist the ETFs that you are looking at.
Source: FSMOne ETF Search
For example, you will find XT China50 USD, a Singapore-listed ETF that tracks the 50 largest and most liquid Chinese stocks. This is good for investors who are not entirely sure what they should invest in, as a single investment into such as ETF would give them broad exposure to large companies such as China Construction Bank, Tencent Holdings, Ping An, Industrial Commercial Bank, China Mobile, Meituan Dianping and 44 other China stocks.
If you are not sure of which ETFs you should be looking at, you can consider FSMOne’s ETF Focus List which provides recommended China related ETFs that you can consider investing in.
You can also use FSMOne’s Fund Selector page to display funds based on the various parameters that you are looking for. The Fund Selector is available for both ETFs and unit trusts.
# 3 Investing Through Mutual Funds
We can also invest in mutual funds or unit trusts that have exposure to the China market.
Mutual funds tend to charge a slightly higher expense ratio as compared to investing via ETFs. This is because funds are more actively managed as compared to ETFs and will have more analysts and fund managers to help them to make the best investment decisions, as well as meet up with companies to better understand their operations and get on-the-ground understanding of the companies. This costs money, and has to be borne by investors, thus leading to higher management cost.
We can easily search for and invest in a diverse range of China-listed companies via FSMOne’s platform, by simply keying in “China” in its Fund Selector page. This is similar to how we can find relevant ETFs which was mentioned in point 2 above.
Source: FSMOne Funds Finder
Taking the example for Fidelity’s China Focused Fund, we can see that there will be a maximum sales charge of 5.25% at the point of purchase, and a 1.5% annual management fee that we have to pay. This can be higher than ETFs, where we have to pay the standard brokerage charge for buying and selling, as well as a smaller annual management fee of 0.6%, in the case for the XT China50 USD ETF above.
It’s important to note that the aforementioned “maximum sales charge” is included in the factsheet as a regulatory requirements. However, depending on the distributors that you are buying the funds from, you may or may not need to pay this sales charge. For example, there are some distributors (including FSMOne.com) that have permanently reduced their sales charge to 0%. So, it is important that you check, and compare, how much sales charge you need to pay (if at all) before investing into a unit trust.
Next, we also observe that the fund is not trying to replicate any indexes. Instead, it is actively trying to beat the index (MSCI China Capped 10% (N)) by holding more stocks in companies it believes will do well and less in companies it believes may not.
This means the returns for the fund will be different to the index. Here, we can see that over a 5-year period and since inception, the fund managed to outperform the index even after taking into consideration a 5% sales charge. Remember, if you’re not paying any sales charge, for example if you invest through FSMOne, you will outperform the index by an even greater margin.
# 4 Investing In Companies That Have Significant China Exposure
Finally, one other method we can use to gain China exposure is to invest in companies that may not be based in China, but have significant business exposure in China. This means that when China grows, these companies also grow. At the same time, they are also regulated in a country that we are familiar with such as in the U.S. or even Singapore.
This is different from investing in a Chinese company that is listed in an overseas exchange.
Some examples of companies in Singapore with significant China exposure would include CapitaLand Limited, which derived 41.4% of its revenue from China and Wilmar International, which derived 56.2% of its revenue from China.
Our options are not limited to just Singapore stocks either. In the US, companies such as Apple and Starbucks, to name a few, derived 16.8% and close to 26.8% of their revenue from China and China / Asia Pacific respectively. So if we want to invest in China through a non-China based company, we can choose to invest in the stocks of some of these companies.
How Do I Get Invested In China?
We can tap on any of the four ways mentioned above to get started on investing in China. What’s also important is that we do not ignore China’s potential. Our decision to exclude China’s exposure from our portfolio should not be because we are unsure of how to invest in the right China-focused companies.
FSMOne can help you get the right exposure to the region, regardless of your knowledge and ability to spot the right companies. FSM clients can either go with mutual funds, buy individual companies or invest in ETFs that are either based or listed in the U.S., Singapore, Hong Kong or China itself.
To mitigate some of the volatility, we could invest in companies that diversify their businesses across Asia or the world, to limit China’s impact on the stock, while still gaining exposure to its long-term upside potential.
Other risks you have to understand include implementing a prudent asset allocation and diversification strategy, taking risks, such as political risk, economical risk and currency risk into consideration when we invest.
As we approach the festive end-year period, FSM is currently running a promotion that rewards you with bonus units into selected funds and 3 free trades for selected ETFs. Find out more about this promotion for Asian Equities on FSMOne here.