Investor interest in China’s A-share market is growing. Robeco Client Portfolio Manager Asia-Pacific Equities Hauke Ris talks about the increasing inclusion factor of Chinese A-shares in the MSCI EM Index, its impact on China’s listed companies and other factors that influence the onshore market.
“This inclusion effectively will increase demand for A-shares. More capital will become available because, in addition to domestic investors, foreign investors – particularly institutional – will be interested.”
“Locally listed companies compete with their peers for capital and the companies that can convince investors best – which ties in with corporate governance – are more likely to be in a competitive position to attract capital. This is important to us as investors. We like to see corporate governance improve, because it creates value for us as minority shareholders.”
Opening up of the A-share market leads to increased institutional flows
“The reforms and longer-term reform themes are going to be important drivers for the Chinese market. There are many examples of policies that impact market performance, such as the cut in the VAT, which supports the private sector. And, yes, the trade war is affecting local sentiment. There is definitely awareness in China of the ongoing trade tensions. There is more awareness now of what is happening internationally than five or ten years ago.”
“So, the trade war is dampening sentiment which was illustrated in May and in August, when after a strong run in the first few months of the year, an escalation of the tensions rattled Chinese equity markets, including A-shares. The trade war is also having a direct impact on the economy and businesses, in particular exporters and technology firms. So the measures are definitely impacting the Chinese economy to some extent, but it is important to note that the large majority of exporters are not listed on the stock exchange.”
“That is a good question for an active investor. In our view, it’s never a good idea to buy a stock just because it is included in an index. We have a concentrated, high-conviction portfolio and the index just does not matter that much. So, as an active investor, our focus is on the fundamentals of stocks and on the price we pay for the expected earnings – particularly in relation to the cost of capital. And that has nothing to do with inclusion in any index.”
“It is still dominated by local retail investors. Retail is responsible for about 80% of the trading volume and while I definitely expect this to change, the process will be gradual. As the market matures and China opens up, it will attract more international institutional investors. This group is much more aware of the cost of trading and, generally, more long-term oriented. They also have a much greater interest in corporate governance, which means that the market – and management teams – will inevitably change.”
“This does affect the A-share market, and investors have to be aware of the uncertainties they face. The Chinese authorities have introduced many meaningful and effective measures in recent years. Yet we have also seen measures that have had a temporary adverse effect on the market. An example is the circuit breakers that were introduced a few years ago. Aimed at triggering a timeout from trading to stop prices tumbling, these had the opposite effect, feeding panic selling and sending the markets into a tailspin. I think it is good to be aware of all of this and the fact that China is still in the development phase, so shocks are to be expected at times.”
“But when it comes to stabilizing the economy in the periods of growth slowdown, infrastructure spending and measures to support the real estate market have proven really effective over the past decade. We expect this year’s consumption and infrastructure spending to also provide support to overall economic growth.”
Corporate governance stands to improve
“What draws the most attention is China’s overall debt position, which has ballooned in the aftermath of the global financial crisis. That debt mostly sits with the state-owned enterprises; China has relatively little household or government debt. The government has made some progress in the management of that debt, which compared to other large markets is not particularly high. It is on the high side though, and therefore it should be monitored.”
“It would be tough to say how total debt levels affect individual companies, but the quality of companies’ balance sheet and their ability to manage it are an important ingredient of our analysis.”
“Also, the opportunity cost for investors of avoiding a certain equity market based purely on its total debt position can be very high, as history has proven. For example, the Chinese equity market generated a return of over 50% in 2017. If you would have avoided this market based on total debt position, you would have severely missed out.”
“Yes, it certainly is versus the offshore market (Chinese stocks listed in Hong Kong and in the US). A-shares is a much larger market. There are many sectors and subsectors that account for over 80% of the total industry exposure in China. An example is the industrial sector. A very large majority of industrial sector stocks are listed onshore, in the A-share market. For us, the industrial upgrading of China constitutes an important theme – through which we are naturally directed to the A-share market.”
“There is definitely some risk associated with lower levels of transparency. This links to corporate governance which needs to develop further.”
“As for volatility, most of this comes from natural factors that are present in every market, but the relatively large retail investor base and some unpredictability surrounding government measures may amplify volatility at times. Yet, the same thing is currently happening in developed markets – like the US, where the market is shaken up regularly by the acts of a powerful leader who is now known to be unpredictable.”
“Although some degree of currency depreciation might occasionally occur as a defensive response in the trade dispute, I don’t believe significant currency weakening is very likely as China has quite an interest in maintaining a stable currency. We think that Chinese authorities will be more inclined to use other measures to stimulate the economy, such as the VAT cut and infrastructure investments I mentioned earlier.”
“Liquidity is not a risk, really. The market is very broad, very deep and liquid, and stock suspension levels have come down considerably. We mostly limit ourselves to larger stocks. Out of roughly 4,000 stocks in total, there is a pool of 500 highly liquid ones. So, liquidity is no more of a risk than in other markets.”
“We do have a quant strategy and our research shows that quant models do well and provide good returns too. It is a matter of taste – what an investor is most comfortable with. We find the approaches to generally be complementary. So a mix of the two can be a good way to go.”
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any US Person.
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)) who are professional investors. By clicking “I Agree” below and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States (within the meaning of Regulation S under the Securities Act) and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States (within the meaning of Regulation S under the Securities Act) and (v) you are a professional non-retail investor.
Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States.
Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction.
We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.This website has been carefully prepared by Robeco Institutional Asset Management B.V. (Robeco). The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use with the general public.