Why I have a third of my portfolio invested in China

"On average, investors are overweight in India and underweight in China," according to Gary Greenberg, fund manager of the Hermes Global Emerging Markets fund. But he is bucking the trend by having a large weighting in both countries while favouring China.

He has 32.6% in China compared to the 29.1% of the MSCI Emerging Markets index, the fund's benchmark. He also has 12.2% in India, compared to the index's 8.7%.

Greenberg argued that the success of emerging economies depends on whether they can transition from being industry-heavy economies to those who capitalise on their intellectual capital.

Asian companies are growing in the space of innovation. Taiwan is known for its semiconductors, Korea for Samsung, and China is successful in the areas of e-commerce and social media.

"Taiwan, Israel, Korea, Poland and Hungary have already made it [out of being emerging economies]," he said. "Now, India is big on building its infrastructure and bringing people out of the informal into the formal economy."

But China is the most interesting investment opportunity for Greenberg. He particularly favours "consumer discretionary and IT companies, as they tend to be privately run and are able to disrupt or support existing businesses".

"The payment systems and features of the social networks in China are further advanced than those of the West," said Greenberg. "It's a well-known saying that if as a developing country you're stuck in exporting commodities - you'll never get rich."

In comparison, back in 1975, the components of the S&P 500 market value, for instance, were 17% in intangible assets - those that are driven by intellectual property and brands - and 83% in old industries. Now the balance stands at 84% in intangible assets to 16% tangible assets.

The same shift is happening in now some emerging countries as well. China is moving from the world's low labour cost factory to an economy focused on intellectual property and strong brands.

In the MSCI EM index in 2007, 12.7% of companies were in information technology. In contrast, this year the industry has the largest weighting with 26.9%.

Greenberg said: "If brains matter - do emerging markets have a shot at becoming the new Silicon Valley? Yes, especially China."

Chinese patent applications have surged by 45% in 2016 and companies are urged to focus on intellectual property. At the same time the number of students in China taking science and technology degrees is increasing steadily.

By 2020, China is expected to spend 2.5% of its GDP on research and development. "It is likely to surpass the US by then," said Greenberg.

China faces a difficult transition from a rapidly growing and export-led economy, to a slower paced economy that is fuelled by consumption. Crucially, China has been growing on the back of debt, which has become burdensome. It also suffers from environmental pollution and unprofitable state-owned enterprises.

But its high-tech companies are creating powerful franchises that are underpinned by a wealth of consumers and their data.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.