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Exchange traded funds (ETFs) continue to grow in popularity, as product providers offer an increasing array of diverse strategies to meet investors’ requirements. So far this year to the end of October, global ETFs and non-fund exchange trade products have attracted inflows of $1.04trn, which is higher than the record $762.77bn gathered in the whole of 2020, according to ETFGI, an independent research and consulting firm. Total assets invested in the industry now amount to $9.98trn. Part of the appeal of ETFs is, of course, their relatively low fees compared with actively-managed mutual funds. However, they also offer other benefits through the ability to trade them on an exchange, with prices made by market makers, who also provide liquidity during periods of market volatility. In particular, ETFs offer investors diversification. An ETF can be structured to track almost any asset class, whether stocks, bonds or commodities, linked to an index or a basket of securities. Active or smart-beta strategies are also increasingly popular. A powerful recent trend among several product providers is to devise ETFs tied to a specific theme. Technology-focused ETFs, with sub-themes such as electric vehicles or biomedicine, have gained tremendous traction, as have ESG or climate change-related products, as well as country-focused ETFs, with discrete China funds gaining popularity among global investors. Traditionally, Asian investors have invested in US or European-listed ETFs because of their bigger size and greater liquidity, but that bias is changing. Last year, Asia Pacific saw 284 ETF launches, more than the combined total of the US (125) and Europe (59), according to data from ETFGI. China dominated in terms of the number of ETFs launched and assets raised, but other markets, including Hong Kong and Singapore also enjoyed a significant increase in ETF assets and trading volume last year. The trend has been maintained this year. The total number of ETFs in China stands at 583 and with assets of $170bn, compared with $30bn five years ago. ETFs listed in Hong Kong, Singapore, as well as Taiwan and South Korea also continue to enjoy inflows as investors choose products invested in Asia Pacific assets that are listed in the region.
Rupert Walker
Regional editor, Asia, Bonhill Group Plc +852 3695 5167 rupert.walker@bonhillplc.com
EDITOR's NOte
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Asia ETF market gathers momentum
FSA Editorial
The appeal of China thematic ETFs
Inflation protection with ETFs
Climate change and the role of index investing
Amundi Asset Management
Investing with ETF: Be a part of China’s new economy
HSBC Asset Management
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Amundi ETF, Indexing & Smart Beta – South Asia
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Amundi ETF, Indexing & Smart Beta – North Asia
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By Rupert Walker, regional editor, Asia, Bonhill Group plc
An ETF can be structured to track almost any asset class linked to an index or a basket of securities. Active or smart-beta strategies are also increasingly popular. A strong recent trend among several product providers is to devise ETFs tied to a specific theme. Technology-focused ETFs, with sub-themes such as electric vehicles or biomedicine, have gained tremendous traction, as have ESG or climate change-related products, and also as country-focused ETFs, with discrete China funds gaining popularity among global investors. In the first 10 months of 2021, Chinese providers have been the most active in launching ETFs among the Asian markets, sponsoring over 200 new ETFs in the year to the end of through October, according to Jackie Choy director of ETF research, Asia at Morningstar.
Asia investors increasingly recognise that exchange traded funds (ETFs) offer a cheap and flexible way to diversify.
Traditionally, investors in the region have tilted towards US or European-listed ETFs because of their bigger size and greater liquidity, but that bias is changing and their options are improving. Last year, Asia Pacific saw 284 ETF launches, more than the combined total of the US (125) and Europe (59), according to data from ETFGI, an independent research and consulting firm. China dominated in terms of the number of ETFs launched and assets raised, but other markets, including Hong Kong and Singapore also enjoyed a significant increase in ETF assets and trading volume last year.
Europe - 59
US - 125
Asia - 284
Jackie Choy
director of ETF research, Asia
Morningstar
China mainland demand
Chinese providers also had a busy October, listing 12 new ETFs. Launches included eight thematic or sector ETFs and four ETFs tracking broad market indexes. The CSOP FTSE China A50 ETF and ChinaAMC CSI 300 ETF, which recorded net inflows estimated at $58m and $44m, respectively. A survey by investment bank Brothers Brown Harriman (BBH) found that 92% of mainland investors expect to increase their ETF allocation in the next year, and that most intend to raise their exposure to thematic ETFs, based on new economy industries such as electric vehicles and robotics. The first mainland China ETF was launched in 2004, but growth has accelerated recently. Total assets under management are now at around $170bn, compared with just $30bn five years ago, BBH data shows — with issuance dominated by domestic asset managers.
The first mainland China ETF was launched
2004
Total asset under management are now
$170bn
Around
Compared with five years ago
$30bn
Two months after MSCI introduced its China mega-cap index, in November, the first ETFs tracking the new index began trading in China, attracting $4bn, which is similar to the AUM of the well-established FTSE China A50, incepted back in 2003. The debut of the four ETFs - two in Shanghai and two in Shenzhen - came after the funds, based on the MSCI China A50 Connect Index, raised RMB26.7bn ($4.17bn) from China mainland investors. The four new ETFs - managed by China Asset Management Co (ChinaAMC), E Fund Management Co, China Southern Asset Management Co and China Universal Asset Management Co - attracted massive interest on their first day of trading. Combined turnover of the four ETFs exceeded RMB10bn, with volume in the ChinaAMC hitting a record RMB3.6bn. The underlying MSCI China A 50 Connect Index selects 50 mega-cap stocks in the A-share market, and fund managers tracking the index say it adopts a more balanced approach in sector allocation than the FTSE A50.
Hong Kong-listed ETFs gain traction
Hong Kong’s total ETF assets under management stood at over $50bn in May, well below the mainland total but at their highest level ever, according to HKEX. Hong Kong-domiciled ETFs offering Chinese onshore equity exposure gathered net inflows of $143m in October, in particular channelled into the CSOP FTSE China A50 ETF and ChinaAMC CSI 300 ETF, which recorded net inflows estimated at $58m and $44m, respectively. The total number of ETFs in Hong Kong stands at 227. Last June, the Hong Kong stock exchange launched a new ETF that offered investors direct exposure to an ETF in mainland China. The Hong Kong product invests directly in an equivalent product listed on the Shanghai stock exchange, as part of a “cross-listing” structure to invest in stocks related to China’s photovoltaic sector, tries to convert light into energy. The first pair of ETFs was the result of partnership between Hong Kong-based CSOP Asset Management Ltd and Shanghai-based Huatai-PineBridge Fund Management Co. A feeder fund listed in Shanghai helps channel mainland Chinese money into Hong Kong-listed CSOP Hang Seng TECH Index ETF, which buys into top Chinese tech firms including Alibaba, Xiaomi and Tencent. In the other direction, Hong Kong investors can access Shanghai-listed Huatai-Pinebridge CSI Photovoltaic Industry ETF through a feeder fund listed in Hong Kong.
Last May, Shanghai and Korean exchanges agreed to launch a cross-border ETF scheme, aiming for closer cooperation in index development and bond markets. In 2019, Shanghai launched a similar ETF connect with Japan. Chinese investors can also access securities in the United States, France and Germany via outbound ETFs listed in Shanghai. Indeed, major US-domiciled ETFs investing in Chinese equities saw net inflows of $1.5bn in October, according to Morningstar. The fund research firm estimates total net inflows of $200m for iShares China Large-Cap ETF and iShares MSCI China ETF. KraneShares CSI China Internet ETF saw net inflows of round $1.3bn, and has enjoyed net inflows of $7.2bn for the year to end of October. So far in 2021, global ETFs and non-fund exchange traded products have attracted net inflows of $1.04trn, according to ETFGI, which is higher than the record $762.77bn gathered in the whole of 2020. Total assets invested in the industry now amount to $9.98trn. Although still a relatively small component of the global industry, clearly Asia-listed ETFs are becoming a more attractive option for the region’s investors.
Asia-listed ETFs are becoming a more attractive option for the region’s investors.
By Sophie He, senior reporter, Fund Selector Asia
For investors who are eager to capture China’s structural trends, the best way is to own China thematic ETFs, according to industry experts.
Investors’ demand for China thematic ETFs has been growing rapidly in 2021. According to Morningstar data, globally there are 154 thematic ETFs which are invested primarily in China, among which, 95 were only launched this year. The estimated total inflows year-to-date as of September 2021 is $6.45bn. The major criteria of judging whether a thematic ETF in China can provide a good opportunity for investors should include: innovation, coordination, greenness and openness, the Huatai Pinebridge Index investment team told FSA, adding that it should also be “on the same page of China’s economic transformation”. From this point of view, technology, new energy and consumption will be core investment themes in China for a long time, the team said. Their view seems to be part of a broad consensus.
New economy sectors
Wilfred Sit, chief investment officer of Hang Seng Investment Management, said that he sees “new economy” as the driving force of future economic growth that goes beyond the technology sector. It is not limited to digital and internet related platforms, but includes a wide array of investment opportunities across different industries ranging from healthcare, consumer related to new energy as well as ESG related themes. “We see this as a blossoming segment not only for now, but for years to come,” he said. “There are abundant opportunities arising from China’s economic transformation. Over the years, China’s economy has been switching its focus, from traditional economy to new economy drivers.” Investors should ride on mainland China’s high market penetration in digital adaptation, for example, online payment apps and social media, which are being integrated into people’s lifestyle. The proportion of China’s new economy sectors to total GDP tripled from 18% to 56% in the last decade, according to Sit. He highlighted the Hang Seng China A Industry Top Index ETF which aims to capture the leaders in the mainland China A share market across 12 industries, including consumer staples, consumer discretionary, financials, healthcare and IT.
Carbon neutrality
Ying Rong, fund manager at China Asset Management Company, also highlighted the climate change theme, and pointed to her firm’s Carbon Neutral ETF. The ETF tracks the CSI Low- Carbon Economy Thematic Index, which comprises companies involved with clean energy power generation, energy conversion and storage, clean production and consumption and waste treatment. Heavyweight stocks in the index include: Contemporary Amperex Technology, Longi Green Energy Technology and China Yangtze Power. Benefiting from China’s carbon peak and carbon neutral targets set for 2030 and 2060, the relevant new energy, energy-saving and environmental protection companies have ample room for performance growth, which is equivalent to a new engine of economic growth during the economic transition period, said Rong. “The major risk is that the short-term valuations have already fully reflected the visible expectations. Once the monetary environment becomes tight or the industry’s prosperity fails to continue, valuations may shrink,” she warned. Rong said that buyers of Chinese thematic ETFs are mostly retail investors, and the total amount of the assets is over RMB300bn ($46.84bn). She highlighted the China A50 ETF, which she manages and is available to offshore investors through the stock connect scheme. The ETF tracks the MSCI China A 50 Connect Index, which is a broad-based benchmark index that captures large- and mid-cap China A shares. New economy companies weight heavily in the index.
Melody He
managing director
CSOP
Wilfred Sit
chief investment officer
Hang Seng Investment Management
Thematic ETFs are invested primarily in China
154
Launched this year
95
estimated total inflows year-to-date as of September 2021
$6.45bn
- Ying Rong - China Asset Management
The major risk is that the short-term valuations have already fully reflected the visible expectations. Once the monetary environment becomes tight or the industry’s prosperity fails to continue, valuations may shrink
Melody He, managing director of CSOP Asset Management, expects carbon neutrality and smart driving to be among the major trends which will reshape the world. Among all the thematic ETFs issued by firm, the CSOP Huatai-Pinebridge CSI Photovoltaic Industry ETF and CSOP Global Smart Driving Index ETF have performed the best, she said. Indeed, Beijing is supporting the growth of the solar photovoltaic sector, according to He. Favorable policies in the new energy sector have been introduced, including the “Action Plan for Carbon Dioxide Peaking Before 2030”, issued by the State Council on 26 October. New energy vehicles (EV) also have policy support in China. The penetration rate of EV was only 4% in 2020, with 3.1 million sales volume, and it is estimated that from 2020 to 2025, the compound growth rate of EV sales will reach 40%. By 2025, the scale of global EV is expected to approach $600bn (from $100bn), and the penetration rate is expected to reach 18%. By 2030, the scale will be twice that of smartphones, with a penetration rate of 38%, according to CSOP Asset Management.
Structural shifts
Mirae Asset Global Investments also believes that China’s pursuit of “quality economic growth” will generate opportunities for investors. Thematic investing focuses on the companies and industries that support or stand to benefit from China’s structural shifts, according to according to Rui Yu, vice president, ETF sales of Global X ETFs at Mirae Asset Global Investments in Hong Kong. As China looks to position itself as a clean energy country, the inflows for Mirae Asset Global Investments’ ESG-related ETFs have been strong, according to Yu. Year-to-date as of 5 November, the AUM of the Global X China Electric Vehicle and Battery ETF have grown 104%, while the Global X China Clean Energy ETF has increased 117%. Yet while thematic ETFs offer investors a different approach to investing than traditional investment vehicles, they also come with risks as the basket of stocks an ETF invests in can be concentrated in a particular industry segment, he warned. “An increasing number of investors, including institutional, wholesale and wealthy individuals are embracing ETFs whether thematic, core, income or actively-managed products,” Yu said. While these types of investors account for a large proportion of ETF investors in Hong Kong, a competitive ETF landscape in addition to heavy brokerage promotions have also played a meaningful role in leveling the playing field, empowering self-directed retail investors to access ESG strategies previously limited to sophisticated institutions, he added.
Rui Yu
vice president, ETF sales of Global X ETFs
Mirae Asset Global Investment
By Michelle Ng, reporter, Fund Selector Asia
Inflation-linked bonds
As the name suggests, inflation-linked bonds protect investors from inflation risks by linking their coupon rates typically to a consumer price index. According to Morningstar, inflation-linked bond ETFs added $5.8bn of new money last month, and these funds have collected a total of $34bn year-to-October. That represents more than double their previous annual flows record and an organic growth rate of 55.4% so far this year. The majority of these funds invest in US treasury inflation-protected securities (Tips), whose principal is tied to the US Consumer Price Index. Thomas Taw, head of Apac iShares investment strategy at Blackrock, told FSA that he favours short-duration Tips, as they tend to be less sensitive than long-duration bonds during periods of rising interest rates. Meaghan Victor, head of SPDR ETFs Asia Pacific distribution at State Street Global Advisors, also likes Tips, which are the largest market segment, but she told FSA that global and emerging market inflation-linked bonds may also be useful to diversify exposure and might better suited for investors’ individual circumstances.
Retail and wholesale prices worldwide are expected to surge over the next two years, according to the Organisation for Economic Co-operation and Development estimations. The average inflation rate across the G20 leading economies is expected to hit 4.5% in the fourth quarter of 2021, while the inflation predictions for 2022 have also been revised up 0.3% to 3.5% by the end of 2022. This has attracted strong demand for ETFs that offer protection against rising inflation and the possible central bank interest rate hikes to dappen higher prices.
Among broader high yield issuance, senior loans, while offering a yield that may be slightly lower on average, tend to offer somewhat more security and exhibit less volatility due to their being more senior in the capital structure, and therefore favourable on a risk-adjusted returns basis
head of ETF, indexing & smart beta sales South Asia
Amundi
Senior loans
Floating rate notes, specifically senior loans, are also gaining popularity among investors who would like protection from increasing interest rates. Rates on these securities move in line with prevailing interest rates, meaning investors usually receive a higher level of income during inflationary periods. “Among broader high yield issuance, senior loans, while offering a yield that may be slightly lower on average, tend to offer somewhat more security and exhibit less volatility due to their being more senior in the capital structure, and therefore favourable on a risk-adjusted returns basis,” said State Street Global Advisors’ Victor. She added that senior loans funds may be considered an “additive exposure or alternative to inflation-linked bonds with improving fundamentals in the credit space”. Sunny Leung, head of ETF, indexing & smart beta sales South Asia, at Amundi agrees that ETFs invested in floating rate notes are a good hedge against inflation. “In addition to their rate rise hedging properties, floating rate note ETFs also bring diversification to a traditional fixed income portfolio and serve to complement other short- to mid-duration strategies,” he said.
- Meaghan Victor - State Street Global Advisors
Gold
Historically, investors often buy gold to protect themselves against price surges. Past data shows that the gold price has risen 8.1% annually on average when the US annual inflation rate has been below 2%, while the gold price has increased by an average annual rate of 14.9% when price inflation is running above 5% a year. The price of the expensive metal has hit at $1,861.39 per ounce, its highest level since mid-June, after the October US consumer prices reported their fastest growth in 31 years. Since the beginning of the year, gold ETFs domiciled in Asia have attracted over $1.25bn in net inflows, while North American and European-domiciled gold ETFs have posted net outflows of $10.69bn and $633m respectively. Leung at Amundi told FSA that ETFs investing in gold are worth considering as it is widely recognised as a strategic inflation-hedge and source of portfolio diversification in times of uncertainty.
Reits
As part of an inflation-hedging strategy, investors should also consider including property ETFs, which provide exposure to listed real estate companies and real estate investment trusts (Reits), said Amundi’s Leung. Real estate ETFs marry two inflation-hedging tools: dividends and real estate, while the property sector is often seen as an inflation-proof investment as rents are generally indexed to inflation. “From an Asia perspective, we have seen clients interested in Reits with demand mainly coming from insurance companies and asset managers in the region,” said Leung. Many investors believe that Reits offer attractive yields compared with bonds in the current market, that is, around 3% versus around 1.5% for the US 10-year treasury note, yet they can also capture the revival of economies as they reopen, according to Leung.
Thomas Taw
head of Apac iShares investment strategy
Blackrock
Commodities
While assets such as gold, Reits and Tips are still good hedges for inflation, Jason Bloom, head of fixed income & alternatives ETF strategist at Invesco, believes they have historically been less efficient as they have a lower inflation beta and thus require a larger asset allocation to cover the inflation risk in a portfolio. “Commodity prices typically rise when inflation is accelerating. As demand grows or supply is constrained, prices of commodities tend to rise, putting upward pressure on the cost to produce goods and services, housing, transport and food,” he said. “As a result, commodities can act as leading indicators of inflation, resulting from both economic shocks and systematic shocks like weather events.” Indeed, recently the relationship between the gold price and inflation has been less pronounced than between inflation and cyclical commodities such as energy, which are more directly tied to consumer and manufacturing activity, according to Blackrock. Instead, the asset manager, like Invesco, favours diversifying into a basket of commodities that can help to hedge against inflation, since they can benefit from an upswing in consumer prices.
- Jason Bloom - Invesco
As a result, commodities can act as leading indicators of inflation, resulting from both economic shocks and systematic shocks like weather events.
There is an increasing appetite among investors to use ETFs to hedge against rising inflation.
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Important information
Looking at the EU climate indices
Beyond this, the primary difference is in the indices’ respective levels of climate intensity. The PAB integrates a more stringent carbon footprint reduction and a restricted investment universe than the CTB – as shown in the chart 1.
The CTB and the PAB indices must comply with strict minimum requirements to achieve their climate objectives. Both require the exclusion of companies that have a negative impact on key environmental aspects such as climate change, pollution, marine protection and biodiversity, as well as companies that are involved in controversial weapons.
Investors have many reasons to choose climate ETFs – it is for this reason that we believe it is important to offer a range of solutions to meet different needs. For example, for some investors, their priority could be managing climate-related risks such as stranded assets. From that perspective, the data in the chart above demonstrates a clear reduction in exposure to companies that:
• own coal, oil or natural gas reserves used for energy purposes (fossil fuel reserves) • derive some of their revenue from thermal coal mining or power generation • derive revenues from activities such as shale gas, oil sands or coal bed methane
These are key industries that may suffer premature write-downs or devaluations as we move from fossil-fuel led power to climate-friendly solutions. Another reason for investing in climate may be an investor’s belief in exposure to innovative sectors with long-term potential. As we see below the CTB and PAB indices have greater exposure to clean technology solutions where companies derive their revenues from alternative energy, energy efficiency, green building, pollution prevention, or sustainable water.
Source: MSCI as of July 30, 2021
Chart 3
• They integrate a backward-looking approach, using reported historical data, and focus on Scopes 1, 2 and 3 upstream (supply chain for operations) and downstream (products) greenhouse gas (GHG) emissions with an explicit allocation towards the most climate virtuous companies • They take into account companies’ long-term climate strategies and their forward-looking commitment towards carbon emission reductions
Significantly, the two benchmarks incorporate new attributes:
Source: Amundi as of end of March 2021, for illustrative purpose only.
Chart 1
Delivering on expectations
Now, over a year since the introduction of the CTB and PAB indices and launch of the first CTB and PAB funds and ETFs, the question is, how are they working and do they really offer a measurable reduction in carbon? Amundi launched a range of CTB and PAB ETFs in 2020. In assessing their impact, we look at the two Amundi climate ETFs that have attracted the most investor interest; these ETFs both offer World equity exposure, tracking the MSCI World Climate Change Paris Aligned Select Index and the MSCI World Climate Change CTB Select index. The primary areas we look at based on the requirements of the benchmarks are the index carbon emissions and the index carbon intensity (see chart 2) where we see a marked reduction versus the parent index.
Chart 2
Ultimately, these new indices provide a more comprehensive approach for index investors to introduce climate investing into their portfolios. We have seen strong demand and enthusiasm from ETF investors who now have the choice of almost 50 different low carbon, fossil fuel free or climate change ETFs. These represent over $11.5bn in assets, 57% of which are 2021 inflows. Amundi has a comprehensive range of PAB and CTB ETFs covering both equity and fixed income and a range of geographical exposures.
The COP26 Climate Change Conference in November has made the urgency of the climate crisis never more palpable. Between 2011 and 2020, we experienced the warmest decade since records began . Years of unsustainable practices brought our planet to breaking point. As we all seek to take necessary steps to curb climate change, what role does financial services play? And how can investors take steps in the right direction?
1
Context of climate investing
Regulation, a driving force in climate indexing
In 2018 the European Commission adopted and published its “Action Plan on Sustainable Finance” , an ambitious and innovative plan bringing together ten key actions to promote sustainable finance. As part of this programme, two new categories of benchmark were created under the Benchmarks Regulation – Climate Transition Benchmarks (CTBs) and Paris-aligned Benchmarks (PABs). The establishment of these categories of benchmark within the EU regulation acknowledged the importance of redirecting passively invested assets towards tackling the climate emergency. They also afforded investors a comprehensive and transparent index approach to addressing climate change. The democratisation of climate investing is essential both for investors and for addressing climate change. We also believe that the impact of low-carbon investing will increase as it becomes more widely implemented. As indexing offers the benefits of simplicity and cost efficiency, the new EU indices will allow extensive adoption by index investors.
Signatories of the Paris Agreement at COP 21 in 2015 committed to a common goal of limiting global warming to within 2°C of pre-industrial levels while striving to keep it to 1.5°C. The 2015 conference highlighted the urgent need for joint and international climate action to achieve a rapid reduction in emissions in order to reach emission neutrality by 2050.
2
3
4
World Meteorological Organization, 14 January, 2021
See
https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en, March 2018
Source: European Commission
https://www.esma.europa.eu/policy-rules/benchmarks
Source: ESMA
Source: ETFGI Global ESG ETF and ETP industry insights July 2021
5
Find out more at
Amundi ETF website
Jacqueline Pang
Head of ETF sales, Asia Pacific
Ray Chan
ETF business development director
For professional investors and intermediaries only. This document should not be distributed to or relied upon by retail clients/investors. This article is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Any views and opinions expressed are subject to change without notice. This article does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management (“AMHK”) accepts no liability for any failure to meet such forecast, projection or target. AMHK has based this document on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information. Investment involves risk. Past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. This article has not been reviewed by the Securities and Futures Commission. The above communication is distributed in Hong Kong by HSBC Global Asset Management (Hong Kong) Limited. HSBC Asset Management is the brand name for the asset management business of HSBC Group. Copyright © HSBC Global Asset Management (Hong Kong) Limited 2021. All rights reserved. No part of this article may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Global Asset Management (Hong Kong) Limited.
Investing with ETF:
Be a part of China’s new economy
New economy is more than technology stocks
Although new economy is often associated with technology, it goes well beyond technology stocks, encompassing a wide range of technology-enabled companies across consumer discretionary, industrials, utilities, healthcare and financial sectors that reflect the rapid development of the digital economy. Urbanisation, rising middle class, consumer tastes and changing demographics in China. New economy can be a new industry, a new business model or new industry structure that invents or applies new technology to create value for users. In fact, the OECD defines new economy as the aspects or sectors of an economy that are producing or intensely adopting innovations or new technologies. New economy-related industries in China are commonly identified by three key thematic lenses: 1. Sustainable rapid revenue growth; 2. Heavy investment in Research and Development - companies have high ranking R&D expense to revenue ratio 3. Strategic new industries defined by Chinese government policies, such as the Five-Year Plan
Portion of China’s new economy sector in the broad market has sharply increased in recent years from less than 20% in 2011 to 70% as of July 2021 . While China’s expanding middle class and growing household wealth have led to a greater demand for quality goods and services, the high market penetration of digital adaptation is driving new economy segments such as online retailing, mobile payment and social media, as evidenced by an all-time high online payment transaction at RMB 605 trillion in the second quarter in 2021 . This transition is not only driven by trends in demographic changes and digitalisation, but also supported by government policies due to the strategic importance of the related industries in China’s long-term structural growth story. The Chinese government has set up major goals in the 14th Five-Year Plan, with an aim to build China into a self-reliance technological and manufacturing powerhouse and to peak carbon emission by 2030. These strategic policies are expected to benefit new economy industries like high-end semiconductor producers, as well as new energy-related companies such as electric vehicle companies. Projection shows that electric vehicles will account for more than 40% of total automobiles in China by 2023, making a notable jump from low single-digit in 2019.
Economic transformation is on the way
With such a wide range of opportunities arising from China’s economic transformation, investing through ETF would be a simple and cost-efficient way to access the booming markets. Apart from those eye-catching Chinese technology giants listed in the US and Hong Kong stock markets, investors should not overlook a large group of new economy stocks in consumer discretionary and industrial sectors with great potentials that are only available in the A-Share market. Examples of these A-share stocks include renowned electric vehicles producers and clean energy companies. Concentration on the offshore markets may risk missing out on the vast opportunities of the onshore market. For investors who are eager to tap into this prominent driving force of China’s growth, ETFs with stock selection across the whole universe of China stocks could offer a more complete exposure to the new economy market. The Hang Seng China New Economy Index covers a universe of over 1,800 Chinese stocks across A-shares, Hong Kong-listed shares and US-listed securities. Index construction starts with screening based on share turnovers as a liquidity parameter. The pool is then narrowed down to around 1,000 stocks from 35 new economy-related subsectors of Hang Seng Industry Classification System and 3 industries in which companies perform major operation by using internet platform. Finally, 100 high conviction companies in terms of market capitalization are selected with a 10% stock weight cap to best reflect the new economy. All index constituents will be subject to semi-annual review . A-shares dominate the share type allocation, taking up approximately half of the index composition, with the remaining evenly split between US listed mainland and HK listed mainland. Investors can access a broader range of names that would otherwise be rules out through this diversification. A specially designed sector ETF that offers a broad representation of the Chinese new economy market creates an access to the fastest growing market segments and helps manage risks with a diversified portfolio, no mention it could be one of the cost-efficient ways to tap into the market.
Capture China’s growth through cost-efficient way
As China undergoes a structural transition from a manufacturing-heavy economy to a consumption and services-led economy, the so-called “New economy” has been in the spotlight of the market.
Three key thematic lenses
Sustainable rapid revenue growth
Heavy investment in Research and Development - companies have high ranking R&D expense to revenue ratio
Source: Datastream, RIMES, Factset, MSCI, Morgan Stanley Research, Hang Seng Investment Management Limited, as of 31 July 2021. MSCI China Index has been used as a proxy for the broad market.
Source: People's Bank of China, 7 September 2021, data as of 30 June 2021; China Internet Network Information Center. National Bureau of Statistics, Hang Seng Investment Management Limited, August 2021, data as of 30 June 2021.
Source: Hang Seng Indexes Company Limited, as at August 2021.
Strategic new industries defined by Chinese government policies, such as the Five-Year Plan
China is boosting non-fossil energy consumption by 2025
Source: WIND, CEIC, Government Work Report (March 2021), HSBC Asset Management, April 2021. Any views expressed were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.
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HSBC Asset Management ETF
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ray.c.m.chan@hsbc.com.hk
