China’s economy is shifting from being primarily focused on investment and manufacturing to a consumption- and services-driven market. In this paper, we use the S&P New China Sectors Index to analyze China’s growing economic sectors and examine their equity, fundamental, and price performance characteristics.
• The main sectors and industries benefiting from China’s economic transformation are Consumer Discretionary, Consumer Staples, Communication Services, Health Care, Insurance, and Independent Power and Renewable Electricity Producers.
• As China’s structural economic reforms deepen, the demand for benchmarks tracking sector drivers is increasing. The S&P New China Sectors Index is designed to provide equity insight into China’s new economy sectors.
• The S&P New China Sectors Index has its largest overweights in Consumer Discretionary, Communication Services, and Consumer Staples, and its largest underweights are in Industrials, Materials, and Financials, compared with the broad Chinese equities market.
• The S&P New China Sectors Index recorded an annualized return of 8.5% between Dec. 31, 2010, and Sept. 30, 2019, outperforming the S&P China 500 by 4.3%, indicating that the new economy sectors performed better than the broad equity market.
• The outperformance of the S&P New China Sectors Index was dominated by sector-allocation effects.
• New economy companies featured higher revenue growth, higher profitability, and lower leverage than the broader equities market, and they tended to be priced with higher valuation and lower dividend yield.