Investors are 'significantly under-allocated to China' despite its growth potential and diversification benefits, UBS Global Wealth Management chief says

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© Naohiko Hatta – Pool/Getty Images Investors are ‘significantly under-allocated to China’ despite its growth potential and diversification benefits, UBS Global Wealth Management chief says

  • UBS Wealth Management’s Mark Haefele says investors are “under-allocated” to China
  • The CIO highlighted Chinese assets’ growth potential and diversification benefits.
  • China is “too big to ignore” after its gov. bonds were included in the FTSE Russell flagship index.

Investors should consider reallocating capital to Chinese assets due to the country’s significant growth potential and diversification benefits, UBS Global Wealth Management said on Tuesday.

In a note to clients, UBS Global Wealth Management’s chief investment officer Mark Haefele discussed three reasons why investors should reconsider their exposure to China and argued many global investors are under-allocated to the country.

The note came after FTSE Russell confirmed the inclusion of Chinese government bonds in its flagship bond index on Monday.

“Many global investors are significantly underallocated to China relative to its weight in global benchmarks, whether because of insufficient understanding of the investment opportunity and market complexity, or other factors,” Haefele wrote.

“Incorporating Chinese assets into a global portfolio can provide both growth potential and meaningful diversification benefits,” the CIO added.

Haefele laid out three main reasons why China should be a part of every investor’s portfolio in his note:

1. “China has become too big and distinct for global investors to ignore.”

The first reason Haefele discussed was the growth of the Chinese economy. The CIO highlighted the fact that China “now accounts for approximately 20% of total global economic output and 30% of annual global GDP growth.” He also mentioned China has become a leader in technology and clean energy. The country hopes to achieve carbon neutrality by 2060.

2. “Financial markets are maturing, making it easier to access investment opportunities.”

The second reason Haefele discussed in his note was the maturing of Chinese financial markets, and in particular, the inclusion of Chinese government bonds in global bond indexes. Haefele says the inclusion will “draw billions of dollars worth of incremental foreign inflows.” The CIO also noted the increasing ease of investing in Chinese assets via foreign equities was a net positive moving forward.

3. “Investing in China offers a diversification benefit for global investors.”

Finally, Haefele said “Chinese economic and interest rate cycles often diverge from major global markets because of its domestically oriented economy and independent monetary policy.” According to the CIO, this means Chinese assets offer diversification benefits for global investors.

In a separate note from UBS Global Wealth Management, analysts Yifan Hu and Kathy Li detailed another reason to think about Chinese assets: the economy’s strong start to 2021.

According to Li and Hu, January through February economic data showed “major activity growth” jumping more than 30% year-over-year in the country. The analysts also found full-year growth for 2021 could potentially expand about 9%.

The UBS data showing strong Chinese economic growth was backed up by Bank of America’s Helen Qiao who said the Chinese economy could double in size by 2035 in a late February interview with CNBC.

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