Cumulative outperformance over the last 15 years for MSCI China versus MSCI EM has been 5,000 basis points, or around 3 percent per year. China has also outperformed emerging markets over both five and ten years, and not by small amounts. Total returns have averaged 5 percent per year in US dollar terms over those periods, and 13 percent per year over the last 15 years.

For us, being overweight China equities in our recommended allocation to clients investing in the EM space is not unusual. Our structural bullishness in the 10 years I have covered China equities at Morgan Stanley is starkly different from that of the consensus amongst global investors and even EM specialist managers, who have been and remain underweight China.

Indeed, the latter group is running a near record underweight on China versus the benchmark of 500 basis points currently, and at no point in the last 15 years have EM specialists ever been anything but underweight China.

So what is it that the consensus is so worried about and what are they missing which we think is positive? In our view, consensus thinking on China has always been too caught up in the macro debate, particularly in relation to debt sustainability, excess capacity and more recently foreign exchange risk.

Consensus has been insufficiently focused on identifying the sources of China’s outperformance, which lie in the market having had a materially higher return on equity (ROE) than the EM average over the cycle, and hence higher earnings growth in US dollar terms.

We believe the roots of that phenomenon lie not so much in an economy that is becoming more leveraged, though it has, but in an equity market that is evolving faster than the overall economy by becoming more consumerand services-oriented as well as more private sector-driven.

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