The “gold rush” in China A shares

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. 

Stay informed in 2020

Stay up to date with my latest views. Hit the FOLLOW button below to be notified by email as soon as I publish my next wire.

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

........
BMO Global Asset Management (Asia) Limited (ARBN 618067959), Pyrford International Ltd (ARBN 165504414) and LGM Investments Limited (ABN 19 381 443 479) are exempt from the requirement to hold an Australian financial services licence under the Corporations Act in respect of the financial services each provides to "wholesale" investors (as defined in the Corporations Act) in Australia. Pyrford International Ltd and LGM Investments Limited are regulated by the Financial Conduct Authority under UK laws, and BMO Global Asset Management (Asia) Limited is regulated by the Securities and Futures Commission under Hong Kong laws, which differ from Australian laws. BMO Global Asset Management (Asia) Ltd ARBN 618067959 is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the financial services it provides to wholesale investors (as defined in the Corporations Act) in Australia. BMO Global Asset Management (Asia) Ltd is incorporated in Hong Kong and authorised and regulated by the Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

Rishi Patel
Portfolio Manager
BMO

Before joining LGM in 2006, Rishi worked with ICICI Securities and General Electric as an analyst researching the IT, Real Estate and Cement sectors. Since joining LGM he has researched Indian stocks and advised on our Indian mandates.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.