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China A-Shares: Sector in Brief
Amid the escalating US/China trade war, no asset class has endured more collateral damage than Chinese equities. Yet active managers have delivered stronger results. This brief research note outlines key issues and considerations for investors.
During the three years to July 2018, while the MSCI China A-shares index lost more than 40% of its value, the majority of managers outperformed it and the median manager delivered positive absolute returns.
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What’s new? Foreign investors have been increasing their holdings in mainland China equity markets. Recent changes to QFII and RQFII programmes have improved harmonisation. New managers continue to enter the market: there is now a credible group of 60+ A-shares strategies alongside nearly 80 “Greater China” strategies.
Investment questions. Do I need a QFII licence? Should I invest actively or passively, and through a fund or a segregated mandate? What are the pros of local strategies versus Hong Kong-based managers investing through the Stock Connect? Which index should I use for benchmarking performance?
Manager selection. While most managers have a fundamental, bottom-up approach, we have seen a lot of quantitative strategies coming to market in recent years. What are the attributes of more successful teams?
The A-shares market, which has broadly struggled over the past decade, slid hard and fast in 2018. In August the country lost its status as world’s second largest equity market to Japan, and then continued to lose a further >$1 trillion in value by mid- December. New tariffs are not the only contributor to the malaise, with worsening global economic data and the government’s austerity-oriented policies also contributing to weak investor sentiment.
Amid the apparent carnage, active managers have delivered stronger results. Commentators are now deeply divided on the outlook for 2019, with some in “get out of here” mode while others emphasise the attractive valuations (aka low prices) on offer. The time seems right to take a closer look at A-shares, the investment opportunities available and the challenges involved. This short note, part of our educational “Sector in Brief” series, draws on available market data and recent bfinance experience analysing managers in this market for our investor clients.
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This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
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