Mainland’s small cap A-share stocks are a smart-money buy, writes Mark Mobius
Mark Mobius manages more than US$40 billion in emerging market assets for Franklin Templeton Investments. He suggests what to buy and avoid during the coming quarter.
The graph shows that Asia markets have been expensive. You can look back at 2008 and even 2010 and 2011, and see that A-shares [denominated in renminbi and traded on the Shanghai and Shenzhen stock exchanges] were more expensive than their H or B counterparts, and in fact the red chips were not much cheaper than the Ashares.
[B-shares are denominated in US dollars; H-shares are China-incorporated firms trading in Hong Kong's stock exchange and red chips are stocks of mainland firms incorporated outside China, listed in Hong Kong].
The reason why it's more expensive is because of its index. It is formulated based on weighted market capitalisation, therefore the big cap stocks account for a greater portion of the index. [The Dow Jones is a price-weighted index]. Those tend to be more expensive, but if you go down to the smaller stocks, you will find a lot of good value, so it can be misleading.
It's the large stocks which are expensive, but it is possible to find smaller, much cheaper stocks in the A-share market. Another interesting aspect is that some A-shares are cheap because of dual listing. Shares listed in Hong Kong are often cheaper. [Sixty-four firms have both A-share listing in Shanghai and H-share listing in HK].
On the whole, the A-share market is a better reflection of China's economy because it's more varied, with more consumer stocks.
Diversify for the next quarter. Don't stick to one market such as Hong Kong, be in China too and as you go forward think about weighting towards Chinese A-shares: not the index, but selected A-shares of smaller firms.
What to avoid
Not many really, but you have to do your homework and look for anything badly managed. One has to do good research to broaden out the list of companies and selectively screen them.
In the medium-to-long term, we believe the Chinese market is going to do very well, even with a growth rate that's decelerating. Even at 5 per cent, that's still very high.
Two sectors worth considering are consumer goods and oil; diversified oil firms, inside and outside China. We are holding both. We'd like to be in pharmaceuticals and biotechnology as well, but they are too expensive at present.