MarketGrader CEO & Founder, Carlos Diez talks about the CSI MarketGrader China New Economy Index, the basis of the VanEck Vectors China New Economy ETF (ASX:CNEW), its composition and how it provides ETF investors with exposure to the most fundamentally sound companies listed in Mainland China.
Jessica Amir: Thanks for tuning into the Finance News Network, I’m Jessica Amir. Today I’m with MarketGrader CEO and Founder, Carlos Diez. Carlos, welcome to the Network and welcome to Sydney.
Carlos Diez: Thank you.
Jessica Amir: First up, for those who aren’t familiar with MarketGrader. Just give us an introduction and tell us about your indices.
Carlos Diez: MarketGrader is mostly a research company, also an index policy company; we’ve been around for almost 20 years. In the early days, we started covering mostly US stocks and we do that using a quantitative system, where we look at fundamental analysis mostly. So our investment view is a GARP, quality-like GARP view and that’s how we’ve always analysed our stocks. Most recently, we’ve been covering about 36,000 companies globally, including the entire Chinese market, which is what we’re really focused on now.
Jessica Amir: Thanks for the introduction, now let’s zoom in on China. Tell us about the China New Economy Index?
Carlos Diez: We’ve had for quite a few years, a pretty unique forward-looking view in China, where we think the exposure investors have to China, will make a big part of how well they do going forward. So it’s the one market where we have a top ten view, where we’re very focused on the consumer part of the Chinese economy and also healthcare and tech. So we actually grade all companies in China, but we pick only the best 120 companies from those four sectors. So consumer staples, consumer discretionary, healthcare and tech.
Jessica Amir: Can you tell us about the performance and the sector exposures?
Carlos Diez: All four sectors are weighted equally; we actually have 30 companies per sector. All 30 companies are equally weighted also within the index. So it’s an equally weighted portfolio across the four sectors, and across 120 companies. It’s done pretty well. You look at the last almost 11 years going back to the end of ‘07; the indexes have about 177 per cent, whereas the overall Asia market is down about 30 per cent. So it’s done pretty well.
Jessica Amir: Can you tell us about the risk and return characteristics?
Carlos Diez: Actually I make a point about that pretty often, because investors have not been paid to own volatility in China. It’s sounds a very volatile market, it has a standard deviation. So we look at about, view about 30 per cent per year. So this index has the same volatility, but unlike traditional passive benchmarks in China, you get paid to own that volatility. So if you return about eight per cent annually before dividends, whereas the market has returned a negative two per cent annually. So like I said, you get paid to own this volatility, it’s a good way to own in China.
Jessica Amir: Now can you tell us about Chinese companies reporting requirements and the regulations?
Carlos Diez: From a reporting requirements point of view, the Chinese market has come a very long way. Regulators are very focused on Chinese companies being up to par with international financial reporting standards, and they’re getting close to that point. So we think the companies are reporting pretty good financials, the regulators are pretty strict there as to how companies are reporting their financial statements. So we’re comfortable with that.
Jessica Amir: Where are they at in terms of valuations?
Carlos Diez: After the drawdown the Chinese equities have had broadly this year, where they’re down about 25 per cent, Chinese equities are trading at historical discounts to their traditional valuations. So in our case our index, that’s the same, it’s trading almost at 50 per cent discount to historical valuation. So it’s a very good time to go in and buy Chinese stocks, going forward.
Jessica Amir: How can investors get their hands on this opportunity?
Carlos Diez: It’s something we’re very excited about. Australian investors can buy the VanEck China New Economy ETF, which is ticker symbol CNEW, a good way to access China here in Australia.
Jessica Amir: Lastly Carlos, before we let you go. What’s your key message that you’d like to leave with investors today?
Carlos Diez: I think the biggest message is how you own China, so there are two things about that. China counts already for a third of the world’s growth, we fast-forward even five years, that’s still going to be the case. Whereas more advanced economies like Australia, the US, all combined will account for only 15 per cent of GDP growth. So it’s important that investors know that, and that they own a significant amount of exposure through to China.
And having said that, it’s also important that that exposure is forward looking and that it’s very tied to the Chinese consumer part of the economy. As opposed to the traditional manufacturing part of the economy. So that’s really what we’re focused on.
Jessica Amir: Carlos Diez, thank you so much for the introduction.
Carlos Diez: Thank you.