Is ChiNext 50 the new Nasdaq-100?

The city of Shenzhen is often touted as the Silicon Valley of China, so it’s only natural that its flagship innovation index – the ChiNext 50 – is widely compared to the Nasdaq-100. But how does that comparison stack up and where does ChiNext 50 fit in the context of a wider asset allocation?

There is no doubt that Shenzhen is a remarkable growth story.  A fishing village before the 1980s, it was designated as China’s first Special Economic Zone in 1980 and is now its third largest city. Shenzhen is the birthplace of tech giants like Huawei and Tencent, drone maker DJI and global battery manufacturer CATL.  Shenzhen and its close neighbour Hong Kong were ranked as the 2^nd largest Global Innovation Hotspot in 2019¹ and the government has a clear strategy to keep advancing Shenzhen’s position as a hub for innovators and entrepreneurs, including a goal to double per capita GDP between 2020 and 2035².

As Shenzhen has grown, the Shenzhen Stock Exchange (SZSE) has grown alongside it as an important source of financing. In 2009, the exchange launched a dedicated board for innovation – ChiNext – as part of a national strategy to encourage independent innovation. When the exchange launched a strategic benchmark, the ChiNext 50, in 2014, comparisons with the Nasdaq-100 were inevitable.

A common philosophy but some different growth engines

By definition, innovation is about finding new ways to do things – it can’t be put in a box or confined within traditional sector boundaries. Both the Nasdaq and ChiNext exchanges epitomise this philosophy: they are focused on growth and innovation, but they are not restricted to tech stocks. As a result, the Nasdaq-100 and ChiNext 50 indices can therefore capture innovation across multiple “growth” sectors.  Typically, they also have low allocations to sectors that are traditionally lower growth, like utilities, energy and real estate.

However, as the chart shows, there are some notable differences. One standout is ChiNext 50’s higher weightings to Industrials. This highlights the importance of trends like industrial automation, electric vehicles and renewable energy in China’s new economy. ChiNext 50 also has a higher weighting in Healthcare, reflecting China’s growing leadership in areas like medical devices and vaccine development. By contrast, Nasdaq-100 is more concentrated in the technology sector – no real surprise given the domination of established tech giants like Alphabet, Microsoft and Apple and the recent rally in AI stocks like Nvidia.  ChiNext 50’s largest stocks are arguably more diverse, with the current top three constituents including EV battery maker CATL, medical device maker Mindray and online financial data provider EastMoney.

The two indices provide an interesting picture of variations in regional growth drivers between China and the US, including government strategic priorities. However, another common feature is R&D spend, often regarded as an important driver of innovation and economic growth. The average R&D spend of companies in both indices is many times the average in broader regional indices like the S&P 500 or CSI 300.

A generational divide

Something we can’t ignore is age. The Nasdaq-100 is now almost 40 years old (a millennial!) and is clearly a large cap opportunity.  Meanwhile, ChiNext 50 is a youthful 10-year old with a high proportion of mid cap stocks and an average market cap of around $10 billion (compared to around $250 billion in the Nasdaq-100). Can the history of Nasdaq-100 tell us anything about the future of ChiNext 50?

Since its inception in 1985, the Nasdaq-100 has outperformed the S&P 500, albeit with higher volatility and a “restart” after the burst of the dot.com bubble in 2000. In the past decade, it has continued to outperform and shown significantly higher earnings growth than the wider US equity market.    

Can we expect a similar story for ChiNext 50? So far, the Chinese index has had a slightly erratic start, significantly outperforming the CSI 300 over some time periods but slightly underperforming it since its inception. However, a P/E ratio of 21 and strong consensus earnings growth estimates for 2024 and 2025³ suggest potential for improving valuations. The rapid evolution of the Chinese economy – underpinned by structural reforms, policy support and ambitious strategies for many growth sectors – also can’t be ignored.

Different roles in an innovation-focused portfolio

Both Nasdaq-100 and ChiNext 50 are part of the same story of global innovation and reflect many of the same megatrends. While Nasdaq-100 could be viewed as core technology exposure, ChiNext 50 represents more targeted exposure to the new Chinese economy, emphasising EVs, industrial automation and healthtech in addition to tech innovations like AI. For investors who see these as the future drivers of growth, it could indeed be the new flagship index for growth innovation.