Will stock picking managers help deliver US$85 billion to China’s A-share market?

As global indices compiler MSCI increases the weightage of Chinese A shares in its gauges, it remains to be seen if stock picking managers, who last month pulled record levels of capital out of China’s domestic stock market through the stock connects, will bolster their positions and increase there exposure.

Investment banks have forecast that as much as 80 per cent of a potential US$70-$85 billion in net inflows into A shares this year, on the back of the increase in MSCI weightage, could come from trades by active money managers, whose role is to pick stocks and beat market benchmarks.

Passive funds, which must mirror changes in MSCI gauges globally, have increased their exposure, meanwhile. On May 28, when the indices compiler implemented the weightage increase, passive funds ploughed US$8.1 billion net in “northbound” trade through the stock connects, a mechanism through which foreign investors can invest directly in Chinese A shares from their Hong Kong stock exchange accounts.

“This is one of the few days on which northbound trade had positive inflows since the US-China trade war broke out,” said Zhang He, Asia-Pacific index research analyst at JPMorgan, adding that by the end of May, northbound trade accounted for 5.3 per cent of China’s A share free-floating market cap.

For the whole of May, however, the A-share market reported a net outflow of 53.2 billion yuan (US$7.69 billion).

Despite the ongoing trade war, some active managers do still view the A-share market as attractive, at times even more than Hong Kong-listed H shares, even though A shares are trading at higher price-to-earning multiples.