UK asset managers expected to target Chinese A-shares

British asset managers are buying into Chinese A-shares ahead of the US index provider MSCI’s inclusion of 234 Chinese mainland-listed stocks on its flagship emerging markets index, which is set for on Friday.

Asset managers with A-share trading experience, such as Investec and Ashmore, confirmed they will continue to buy A-shares.

“The Chinese market offers one of the best growth profiles while the valuation level is below the historical average,” said Ma Wenchang, assistant portfolio manager of Investec All China Fund. As of December 2017, the fund has taken positions in $6.8 billion of Chinese stocks. And by March, it had generated a 22.1 percent annualized return for the past three years.

“We believe early investors can take advantage to grow with the world’s second-largest equity market and build up experiences that will help long-term outperformance,” she said.

Despite China’s A-share market being the second-largest globally, global investors hold only around two percent.

The situation is expected to change significantly with the MSCI index inclusion, because funds that use MSCI’s emerging markets index to track their performance are expected to increase their Chinese stocks holding to match the MSCI weighting. Currently, around $1.5 trillion in global assets are benchmarked to the MSCI Emerging Markets Index.

Jan Dehn, head of research at Ashmore Investment Management, said his team supports the inclusion and believes A-shares represent compelling opportunities.

“The enormous Chinese market always offers attractive opportunities,” said Dehn.

Ashmore has been investing in the A-share market for two decades through special routes and significantly stepped up its A-share holdings in 2014 when the Hong Kong Shanghai Stock Connect opened.

Meanwhile, funds new to A-shares are looking to gain exposure through buying exchange-traded funds, or ETFs, which are financial products that bundle together a basket of stocks, diversify risks, and reducing fund managers’ stock-picking workload.

The demand for A-share-linked ETFs has encouraged investment banks and asset managers to list them on stock markets across Europe.

Guangzhou-based GF Fund Management listed one such ETF on the London Stock Exchange last year, and the Hong Kong-based China Post Global plans to do the same next month.

Danny Dolan, managing director of China Post Global, said the new ETF’s creation is a response to strong demand from clients, including European investors who are benchmarked to the MSCI emerging market index.

“As familiarity grows among international investors, investment in China will grow steadily too,” said Dolan.

Despite the opportunities, concerns still exist, including worries about the Chinese stock market’s volatility and corporate governance that need more improvement.

Currently, 37 percent of the 234 domestic Chinese companies that will be listed scored MSCI’s lowest environmental, social, and corporate governance rating. And 8 percent of companies on the MSCI EM index are scoring the lowest rating. The rating is used by asset managers to mitigate risk.

Steven Sun, head of research at HSBC Qianhai Securities, said he believes corporate governance is the biggest concern among international investors looking to buy A-shares.

However, in the medium- to long-term, Sun expects Chinese companies’ scores to improve.