hongkongen
Five reasons for a strategic allocation to China A-shares

Five reasons for a strategic allocation to China A-shares

19-09-2018 | Insight

As the A-share market is opening up to investors and MSCI has just taken its first step to include A-shares, a lot of capital is expected to flow into the onshore Chinese market. Besides this tactical reason to invest in Chinese A-shares, they merit a longer-term allocation as well. Here are five reasons why Chinese A-shares should be part of a portfolio’s strategic allocation.

  • Victoria  Mio
    Victoria
    Mio
    CIO China, co-Head Asia Pacific Equities, Fund Manager Robeco Chinese Equities
  • Jie Lu
    Jie
    Lu
    Head of Research China
  • Hauke Ris
    Hauke
    Ris
    Client Portfolio Manager Asia-Pacific Equity

1. The A-share market is the world’s second largest equity market

The Chinese A-share market, i.e. the Shanghai Stock Exchange and the Shenzhen Stock Exchange combined, constitutes the world’s second largest equity market after the US. Its market capitalization is approximately USD 8.8 trillion.

To foreign investors, the A-share market has effectively been a sleeping giant, which has largely been ignored. Up until now this made sense, given the market’s closed nature, but now that it is opening up, investors can no longer afford not to make a conscious decision about whether they want to invest in this market or not.

2. MSCI is including A-shares in its indices this year

This year, MSCI is including Chinese A-shares in the MSCI Emerging Markets Index, starting with a 5% inclusion factor. This is an important step, as it is expected to support the renminbi and improve the A-share market’s investor structure from retail-dominated to a more balanced mix of institutional and retail investors. Furthermore, the inclusion will likely improve China’s capital market liberalization and regulation. Full inclusion will take five to ten years, depending on progress in market accessibility.

A-shares’ inclusion in relevant indices means that, as of now, not investing in them is an active decision, which for index-aware investors comes down to taking an active underweight position.

3. Some of China’s biggest opportunities are only available in local markets

The Chinese A-share market accounts for 70% of the market capitalization of all Chinese listed stocks. It offers investors even more diversification potential than offshore H-shares: among the 15 key sectors, there are ten sectors with over 70% of their market capitalization listed in China A-shares only.

The market offers exposure to state-owned enterprises (SOEs). These stocks, although often in old economy sectors, are expected to make significant progress in terms of mixed-ownership reforms and improved corporate governance. Some sectors that make up the ‘new economy’, like healthcare, consumer products, services and technology, as well as the Industrial Upgrade theme are showing better growth than the market as a whole. They account for about 40% of total A-share market capitalization.

4. Low correlation provides diversification

The Chinese A-share market has a low correlation with global equity markets (see table 1). One important reason is that it is still largely driven by local retail investors, who hold over 50% of the market’s total free float market capitalization and account for 87% of total trading volume. Retail investors tend to have a shorter-term investment horizon and behave differently from institutional investors.

Table 1 | 5-year correlation of Chinese A-shares with four major indices

Source: Bloomberg, Deutsche Bank Research. Period: Feb 2013-Feb 2018.

A second reason is that the market has been closed to foreign investors for a long time and is only gradually opening up. True, this will eventually increase the market’s correlation with other equity markets, but this will take time. Currently, 2% of market capitalization is foreign-owned, against 31% for Japan and 20% for the US.

5. Early stage of development provides significant alpha opportunity

The Chinese onshore stock market did not open until 1990 and has only gradually been admitting foreign institutional investors since 2002. This market is set to grow further as corporate earnings improve, more companies are listed, and A-shares are becoming more broadly available to global investors.

Table 2 lists the returns on Robeco Chinese A-share Equities since inception in March 2017 and the MSCI China A International index. As the track record shows, the A-share market’s structure and predominantly retail ownership offer substantial alpha opportunities. As this will only change gradually, these opportunities will be around for quite some time.

Table 2 | Annualized performance Robeco Chinese A-share Equities - 30-06-2018

Source: Robeco. * Figures for Robeco Chinese A-share Equities, gross of fees, based on net asset value, in USD. In reality costs such as management fees and other costs are charged. These have a negative effect on the returns shown. The currency in which the past performance is displayed could differ from the currency of the country in which you reside. Due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. The value of your investment may fluctuate. Results obtained in the past are no guarantee of future performance.

Conclusion

Chinese A-shares are becoming increasingly important for global investors. There are five good reasons why they should be part of a strategic core allocation in a portfolio. Of course, like any other market, it is not a bed of roses either. It’s important to monitor the market closely, and changes in factors such as valuations and earnings will require tactical portfolio adjustments. This however does not detract from the strong case for a long-term, strategic position in Chinese A-shares.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree