In Focus: Chinese Financial Stocks

Are Chinese banks a risk to your emerging markets investments? Or are they run as well as their developed market counterparts?

Cyrique Bourbon 7 February, 2018 | 3:06PM
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Are banks in emerging markets managed prudently or could they pose a risk to your investment portfolio? Given that financials are the second largest emerging markets sector after technology, they remain an important element of financial market stability. Therefore, with changes to shadow banking as well as increasing debt levels, especially in China, we investigated whether the businesses operating within emerging markets are fundamentally sound or potentially at risk.

Framing the Risks in Emerging Markets

Before we dig into the details, it is important to gain a broad perspective of emerging market financials. The largest country exposure is unsurprisingly China, accounting for 29% of the index, with the next 42% spread reasonably evenly between India, Brazil, Taiwan, South Africa and South Korea, whilst the remainder is divided among other nations. Therefore, while emerging market financials are certainly not isolated to the China story, they are heavily influenced by it.  

Yet before one thinks of it as a diversified exposure, amazingly, 85% of the book value among emerging markets financials is now attributable to Chinese banks alone. Under this backdrop, it should be little surprise that the book value of the sector has grown very quickly over the past 20 years. In fact, as can be seen below, the book value in nominal terms has grown at almost three times the rate as the developed market equivalents, resulting in a sizeable premium to developed market financials.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Cyrique Bourbon  is multi-asset portfolio manager for Morningstar Investment Management EMEA