The Sinodependency index: Is exposure to China still a good thing?

The Sinodependency index

Declaration of Chindependence

For an American multinational, is exposure to China still a good thing?

Jul 20th 2013 | SYDNEY |From the print edition

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BEFORE the global financial crisis, emerging economies like China aspired to “decouple” themselves from the rich world, hoping that local demand and regional trade would sustain them even if Western markets faltered. After the crisis, rich economies aspired to couple themselves with China, one of the few sources of growth in a moribund world. Carmakers in Germany, iron-ore miners in Australia and milk-powder makers in New Zealand all benefited enormously from exports to the Middle Kingdom. Every company needed a China story to tell. But as China slows and America gradually recovers, those stories are becoming less compelling. Some of them are turning into cautionary tales. Exposure to China does not always endear a firm to investors, as GlaxoSmithKline, a British pharmaceutical giant embroiled in a corruption scandal in the country, is now discovering. As a rough gauge of multinational exposure to China, The Economist in 2010 introduced the Sinodependency index, a stockmarket index that weights American multinationals according to their China revenues. The latest version of the index includes all of the members of the S&P 500 index that provide a usable geographical breakdown of their revenues. The weight of each of these 133 firms in the index reflects their market capitalisation multiplied by China’s share of their revenues. A company worth $100 billion that derives 10% of its revenues from China has the same weight as one worth $20 billion deriving half of its revenues from China. Where firms report their revenues for Asia-Pacific but not for China, the index assumes that China’s share of regional revenues matches its share of regional GDP. The biggest members of the index are Apple, with an 11% weight in 2013, followed by Qualcomm (8.3%) and Intel (7%). Most of the firms in the index are more dependent on China now than they were. China accounted for 11.2% of their revenues on average in 2012, compared with 9.8% in 2009.Although the dependence has risen, the rewards have not (see chart). After handily outperforming the S&P 500 benchmark in 2009-11, the Sinodependency index has since struggled to keep pace. So far this year it has risen by 9.6%. That is far better than China’s own stockmarkets, which have fallen by over 9%. But both have been overshadowed by the much stronger performance of the conventional S&P 500 index, which is up by 18%. Perhaps the 367 S&P 500 companies that are not in our index should loudly proclaim their Sino-independence.

The Sinodependency Index

Middling Kingdom

Jul 17th 2013, 20:34 by S.C., G.S. AND A.R.

CHINA’S significance to the world economy is easy to see but hard to quantify. So in 2010 The Economist introduced the first Sinodependency Index, as a rough gauge of China’s influence on the fortunes of American multinationals. The index tries to show whether their exposure to the Middle Kingdom is reflected in the performance of their shares.

The latest version of the index, which we discuss in an article this week, includes all of the members of America’s S&P 500 that provide a usable geographical breakdown of their revenues. This now amounts to 133 firms. Each firm’s weight in the index reflects their market capitalisation multiplied by China’s share of their revenues. So a company worth $100 billion that derives 10% of its revenues from China has the same weight in the index as one worth $20 billion deriving half of its revenues from China.

The method has a couple of wrinkles. First, some firms report their China revenues explicitly. Many others only report revenues for the Asia-Pacific region (excluding Japan). In those cases, the index assumes that China’s share of the company’s regional revenues matches China’s share of regional GDP. Second, a company’s geographical make-up obviously evolves over the course of the year. But firms typically report their revenue shares only once a year in their annual report. To prevent their weights jumping discretely at the end of each year, we’ve smoothed their revenue shares from one year to the next.

The firms in the index are more dependent on China now than they were when we introduced the index. China accounted for 11.2% of their revenues on average in 2012, compared with 9.8% in 2009. But this increased exposure to China has been of diminished benefit in the past 18 months. This year and last, the Sinodependency index underperformed the straightforward S&P 500. But if it’s any consolation, it still massively outperformed China’s own miserable stockmarkets.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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