The growth and sheer dynamism of the Chinese economy and its stock market continue to offer the potential for attractive returns for active investors in Chinese equities. The question, therefore, becomes one of how to approach investing in China. There are a handful of huge companies which have come to dominate China and emerging market equity indices. As a result, most investors holdings in Chinese equities - be it via China, Asia or emerging market funds - tend to be concentrated in a small number of well-known companies that have already achieved ‘mega-cap' status.
Allocation skewed towards mega-caps
Currently there are 730 Chinese companies listed in the MSCI China Index (as at 31 July 2021) - yet the investable universe comprises more than 5,500 listed stocks. In short, the index is not an accurate representation of the opportunity set. With such a large investment universe it is perhaps surprising then to note that the largest 100 stocks, by market cap, account for a staggering 71% of the MSCI China Index.
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