The Evolving Case for Standalone Allocation of Chinese Equities

Even though China is the world’s second largest economy based on both GDP and market capitalization, due to MSCI’s inclusion rules China is only the fourth largest country weight in the All Country World Index (ACWI). So, why add an allocation now? As MSCI adjusts its inclusion factor over the next several years, the higher weight of China in ACWI should provide a tailwind for Chinese equities. In addition, Chinese valuations appear fair relative to their own history and cheap relative to other global valuations. Finally, we will concede that investing in China poses risks, especially compared to developed markets, but think the potential opportunity calls for a higher portfolio weight than MSCI ACWI would imply.