The opening up of the Chinese market

20 August 2018

By Alex Burn, Co-Fund Manager HC Verbatim Multi-Index Funds

In a recent landmark move, index provider MSCI recently included more than 230 Chinese stocks, known as A-shares, in its emerging market indexes. A-shares are the stocks of Chinese companies listed on the mainland and quoted in the main domestic currency, the renminbi.

The new Chinese A-shares

This introduction of a limited number of Chinese A-shares to the MSCI benchmarks is the beginning of a long process before it reaches its full weighting, which is not likely to be for a few years. Secondly, and importantly for investors, the types of exposures which are available through the domestic market are far more centred on the ‘new economy’ such as IT, consumer and healthcare rather than the offshore shares which are more ‘old economy’, typified by energy, materials and industrial stocks. Additionally, these onshore shares are typically more private companies rather than state owned enterprises and so have higher profit and efficiency levels than the government owned companies.

What is the likely impact?

The initial passive flows that will follow their introduction are relatively minor. Of more significance is the improving sentiment from investors towards the Chinese market and an increase by more globally focussed portfolio managers to include some of the larger names in their portfolios as well as an improving, all be it from a low base, attitude by regulators to open and improve protection for foreign investors in domestic stocks.

How we access the market

Among the funds we use to access China is the Hermes Asia ex Japan fund.  It is not run specifically by a China manager but they have invested in A-shares for a number of years. Additionally, being all of Asia it enables the fund to access A-shares when they view them as truly attractive, rather than being forced to hold them because of index constraints or a more limited universe.

In our more focussed China portfolio we hold the BGF China fund. Blackrock’s Asian franchise has evolved over the past five years following the arrival of team head Andrew Swan in 2012. Andrew has entirely rebuilt the research team and approach from the bottom up, the China research team has a particularly strong reputation given the teams recognition of how important the countries fortunes are to that of the overall region.

The bulk of our exposure to China is achieved through regional Asia funds rather than country specific portfolios. The main rationale this is that being pan Asia allows managers to seek the best opportunities across the entire universe without being constrained.

Outlook for China

Our current outlook for China is broadly positive thanks to continued strong GDP growth and the globalisation of the currency and financial markets as well as some positive steps being taken to reform the economy and society. This has been tempered mainly because of concerns around worsening investor sentiment, firstly on the relative slowdown in growth, secondly, an expectation of higher, but in our view not significant, company defaults over the next three years.

Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use.