China’s Corporate Governance Reforms: A Positive Catalyst for Investors
The recent announcement of China’s “
Nine-Point Guideline
” has sparked hopes among investors for the improvement of corporate governance in the country. This, combined with a reshuffle at the Securities Regulatory Commission and a push for capital returns, indicates a positive shift in the government’s approach towards the equity market.Historical Precedent and Expected Market Performance
Similar corporate governance reforms in the past have been rewarded with positive market performance. The implementation of these reforms is expected to incentivize more long-term capital, creating new opportunities for investors.
Opportunities in Large-Cap Chinese Stocks
Large-cap Chinese stocks are currently available at a discounted ~9x forward multiple on a growing earnings base. These reforms present an opportunity for investors to benefit from both valuation re-rating and enhanced capital returns.
Franklin FTSE China ETF (FLCH): A Strategic Investment
The Franklin FTSE China ETF (FLCH) is well-positioned to capitalize on the positive developments in China’s equity market. FLCH offers a diversified portfolio of Chinese companies, with a focus on lower-priced offshore listings. Its low fees and narrow spreads make it an attractive investment option.
Strong Portfolio Tilt towards Tech Blue-Chips
FLCH’s portfolio is heavily weighted towards the tech sector, with Tencent and Alibaba being the top holdings. The fund also has exposure to other leading Chinese companies, including PDD Holdings, Meituan, and major financial institutions.
Signs of Recovery and Favorable Risk/Reward
Despite several years of negative returns, FLCH has shown signs of recovery in 2023. Its low tracking error and well-covered dividend yield make it an attractive choice for investors seeking exposure to the Chinese market. The market’s pricing of lower earnings growth provides a margin of safety, enhancing the risk/reward profile for investors.
Positive Outlook for FLCH
With the implementation of corporate governance reforms and supportive policy measures, the outlook for FLCH is positive. Investors should keep an eye out for further catalysts, such as increased cash dividends and share buybacks, as earnings season approaches.
