There is a growing buzz around accessibility of Chinese onshore (A) equity to a wider investor base (due to the further inclusion in widely used market indices).       

While it is not optimal that it took an index provider to spur interest, the growing accessibility to the market, combined with the significant influence China has in the global economy cannot be ignored by international investors any longer.

The narrative around China needs to shift from that of a simple secular growth opportunity to a dynamic asset class with improving governance and resilience. The market has undergone a tectonic shift from an exporter of cheap manufacturing goods to a dynamic and thriving market which is globally competitive and at the cutting edge in many sectors.

There is a deep pool of possible investments across sectors and industries. Some nuances in the market making it highly appealing to stock pickers, for example.

  • The market is dominated by retail investors (70-80% of market turnover)
  • Foreign investors account for about only 5% of market cap
  • Lack of research coverage and institutional engagement
  • Insufficient supervision on companies listed, and lack of a de-listing system in A-shares

This speculative behaviour leads to significant mispricing in the market that may result in an attractive opportunity for skilled active managers to generate alpha over the long term. There are of course some concerns that there may be a “gold rush” as the index providers continue to increase the weight of the A share market in the mainstream indices. This will inevitably lead to a large amount of capital being blindly allocated to any and all companies when clearly there is material difference between the highest and lowest quality.

While headlines are dominated by the current trade spat between the US and China, we believe having an open mind towards the market is something investors cannot ignore in the coming years. 

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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.