Equity China - sustainable and risk-optimised

Although still classified as an «emerging market», the Middle Kingdom has moulted into a global heavyweight in recent decades. The world's most populous country now not only has the second-highest gross domestic product and the largest export volume of goods and services, but is also expected to replace the USA as the most powerful economy by 2028. 

As the real economy rose, so did the financial markets. For a long time, the investment universe was manageable, market capitalisation was low and the tradability of shares for foreign investors was severely limited. In recent years, the situation has improved significantly and the Chinese stock market has become more attractive: Today, an investor benefits from the additional diversification potential and the attractive risk-return profile. 

China is systematically underweighted 

Many investors are already invested in Chinese stocks - often via index solutions that track an emerging market index (MSCI Emerging Markets Index). But does this approach do justice to China's growing equity market? Not really! If one compares the index weight of China equities and the size of the gross domestic product, it quickly becomes clear that China is significantly underweighted in standard indices. This is because Chinese shares are traded on different stock exchanges and not all trading venues are included equally in the index weighting. 

Therefore, we recommend that you consciously and separately determine the China exposure and not simply base it on a standard index solution. 

China equities with optimisation potential

If we compare the investor structure of established equity markets with that of China, we can see clear differences. While the majority of investors in Switzerland are institutional investors with a broadly diversified «buy & hold» approach, trading-oriented private investors dominate in China. The contrast manifests itself in concentrated portfolios and frequent transactions. This investor behaviour leads to greater price fluctuations - i.e. increased market volatility. 

Those who allow themselves to be deterred by the comparatively greater risk give up not only returns but also positive diversification effects. A volatile market contains considerable optimisation potential. OLZ risk optimisation can prove its value in such an environment. This is one of the main reasons why we are launching the «OLZ Equity China Optimised ESG» fund. 

OLZ Minimum Variance - a proven concept 

Our new fund is based on the investment universe of the MSCI China Index with around 700 stocks. In addition to restrictions on liquidity and data availability, stricter ESG criteria in particular are taken into account. Companies that violate fundamental sustainability criteria are filtered out. ESG also flows directly into the minimum risk optimisation, so that we achieve a roughly 20% higher MSCI ESG score than in a standard index solution. 

The peer group comparison with our simulation since 2015 shows that the sustainable and risk-optimised OLZ approach is suitable for China equities. 

The improvement in the risk-return profile resulted not only against the MSCI China Index, but also against other active China funds. 

For us it is clear: Chinese shares belong in a portfolio. We have also discussed and analysed this together with WPuls AG in a publication «Why Chinese equities belong in a portfolio». Because from a risk perspective, too, a direct investment in Chinese equities is becoming increasingly urgent. The People's Republic of China is increasingly looking inwards - products and services are to be manufactured in the country itself. The risk that foreign companies will lose lucrative market shares is therefore increasing. An active investment strategy is therefore also the right decision here. The flexibility to exclude individual companies or even entire sectors can reduce risks, especially in this rapidly changing environment. Together with a risk-optimised investment approach, this effect is reinforced.