The Real Risk of Chinese ADRs (Part Two)
Are Internet-biased ADRs aligned with China's future growth drivers?
Warning: A pretty long article with several charts and tables.
The time was September 2015. The place was Sydney, Australia. I was on a business trip raising the investor awareness of China A-shares. Sitting across the table was a respected institutional investor, working for one of the large super funds.
“This is interesting… but I don’t think we need any more Chinese equities. Eight percent of my portfolio are Australian stocks that already have heaps of China exposure”, the investor said.
He was not wrong. The ASX index was heavily loaded with energy, metals, mining and banking stocks. The former three mostly sold their products to China. And the banks also had indirect exposure to China because they made loans to those doing business in China.
For the rest of the meeting, I tried to convince the investor that he might have the “wrong” China exposure on a forward-looking basis. It was good that Australian companies benefited from the commodity boom in China. But China’s economic model was also changing, moving from real estate and low-end exports to consumption and advanced manufacturing. As an Australian investor, you need exposure to Chinese consumption, healthcare and technology, which you can’t really get from Australian stocks. You need China A-shares.
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