What’s performing in China?

In December 2017, WisdomTree partnered with Standard & Poor’s (S&P) to launch the most inclusive Chinese beta product that tracks the S&P China 500 Index.

The WisdomTree ICBCCS S&P China 500 Index ETF, CHNA.B, gives investors seeking a beta exposure to Chinese equities access to the broadest diversity of opportunities in the market by investing in H-shares, B-shares, A-shares and P-chips: shares listed in Hong Kong, Shanghai, Shenzhen, Singapore and New York.

Share Class Attribution

There was a great deal of market interest when MSCI announced they would start to include A-shares in the summer of 2017. Since then, current A-share exposure in the MSCI China Index is just over 2%, despite A-shares representing the largest segment of the Chinese equity market. In our view, the S&P China 500 Index provides a more representative exposure by allocating close to 50% to mainland shares.

Breaking down exposures by share class, you can see the impact of gaining broad access to the Chinese equity market. In the performance attribution table below, we can see how the S&P China 500 Index has a more balanced exposure across the different share classes than the MSCI China Index, which limits its exposure to class A-shares.

Since the beginning of 2019, the Chinese equity market has experienced strong growth, and the S&P China 500 Index has been in the best position to take advantage of this rebound, having nearly 50% exposure to class A-shares versus the MSCI China Index’s 2.05% exposure. This allocation was the primary driver for the almost 600 basis points (bps) of outperformance that the S&P China 500 Index had in the first quarter of the year.

 Better value and higher quality

Another consequence of having an increased exposure to class A-shares comes in the form of better valuations and increased quality as measured by price-to-earnings (P/E) and return on equity (ROE), respectively. As shown below, we can see that over the past year, the S&P China 500 Index has had higher average exposure to the highest ROE quintile, while also being underweight in the lowest ROE quintile and negative earners.

Average Portfolio Weight – ROE Quintlies 

In terms of P/E quintiles, we can see that having a better valuation and lower exposure to the most expensive (highest P/E) quintile has translated into outperformance since the beginning of the year.

In our view, there will continue to be increased convergence between the role that China plays in the global economy and the role it plays in global portfolios. Through our collaboration with S&P, we are able to provide exposure to the most inclusive Chinese beta product that tracks the S&P China 500 Index.

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