A-share corrections to come if MSCI says yes, says AllianzGI

Asian markets, particularly India and Indonesia are favoured by the active investment house for both equity and fixed income investments

PUBLISHED : Tuesday, 20 June, 2017, 6:59pm
UPDATED : Tuesday, 20 June, 2017, 7:02pm

China’s A-share market will see short-term corrections if MSCI decides to included it in its emerging market index, given that some stocks have already rallied in anticipation of a favourable outcome, say analysts at Allianz Global Investors (AGI) on Tuesday.

The active investment manager, with assets under management worth 490 billion euros (US$546 billion) as at March 31, also argues that the US equity market will continue to underperform Asia and Europe for the rest of the year.

As global investors have given Asian stocks the biggest underweight in five years, it is good time to buy now, the analysts urged.

On Wednesday, the global equity benchmark provider MSCI will announce the result of its fourth review of whether to include A-shares into its heavily tracked emerging market index. If the decision on June 20 was positive, formal inclusion will start a year later.

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Investors including Allianz expect the A-shares to take 0.5 to 1 per cent weighting in the index at an initial stage in 2018.

“Buy the rumour, sell the fact. If MSCI says yes, we believe there will be volatilities on China’s equity market,” said Raymond Chan, chief investment officer, equity Asia Pacific at AGI.

He said local and foreign investors who had already hoarded some A-shares with sound fundamentals in anticipation of inclusion, may take profit after the MSCI decision.

Equities under the stock connect schemes that are directly tradable by offshore investors, and particularly those linked to sectors including consumers, tech and industrials, are most likely to undergo volatility, although the inclusion will be positive for the long term, he added.

“We see the chance for inclusion to be higher this year, compared to the last three times, at 50 per cent. But there is one remaining hurdle that’s unaddressed, that foreign institutions will need approval from Chinese exchanges for launching offshore products linked to A-shares,” Chan said.

If MSCI says yes, we believe there will be volatilities on China’s equity market
Raymond Chan, AGI

Globally, Allianz said non-US equity markets, particularly Asia and Europe, would outperform the US market this year, which is weighed down by heightened risks associated with Trumponomics.

“Fundamentals look solid and strong in Asia, boosted by real structural reforms and the struggling US dollar. Positive corporate earnings revision also supports a good story on Asia,” Chan said.

Allianz said valuation for Asian equities excluding Japan, were an almost 30 per cent discount from the US equity markets. Asian companies have the highest level of cash on their books, compared to US and Europe, and the weight for emerging market in global equity funds is at the lowest level in five years.

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“That gives a good buying opportunity for Asian equities,” Chan said.

“We are bullish on Indonesia and India with improving macro facts and potential positive catalyst from reforms that should offer investors good longer term returns,” he said.

Asian markets were also favourable for fixed-income investment, said David Tan, chief investment officer, fixed income Asia Pacific with AGI.

“With the unpredictability surrounding the Trump administration, we expect market volatilities to escalate.

“Against the uncertain backdrop, we believe an actively managed Asian fixed income portfolio can continue to offer decent yield pick-up with relatively lower volatility,” Tan said, adding Allianz likes Indonesian and Indian bonds due to that market’s ongoing reform and improving fundamentals.

As for China, Chan said the country “will make further progress in maintaining financial stability but its overreliance on debt is glaring”.