Global investors bullish on Chinese big-caps even as ace analyst forecasts subdued movements
Foreign fund managers will probably add holdings of Chinese big-cap companies after the nation’s US$7.7 trillion stock market is integrated into global equities, even as the most accurate analyst predicts stocks will remain subdued through the rest of the year.
Global investors may buy into shares of companies that are less represented in the offshore markets, such as health care, household appliances and liquor makers following MSCI’s announcement last week to incorporate 234 mainland-traded stocks into its benchmarks, according to JPMorgan Asset Management and Man Group.
They are undeterred by a call from Hong Hao, managing director at Bocom International Holdings, who successfully predicted the bursting of the 2015 Chinese stock market bubble, that China’s equity benchmark is likely to be rangebound this year.
Mainland shares “can offer notable heterogeneity and breadth of sector exposure”, said Ed Cole, a portfolio manager at Man Group with US$112.7 billion in assets under management. “For us, one of the key attractions is the potential to find reasonably valued, high-quality businesses across various different sectors that are not represented offshore.”
Cole specifically mentioned shares of white goods appliance makers, new-energy bus manufacturers and airport operators as top picks for foreign investors, without naming individual picks.
While foreign interest seems to be largely limited to big companies trading in the mainland’s stock market, also known as the A-share market, the sector looks increasingly out of favour among local traders. The benchmark Shanghai Composite Index of mostly large caps has dropped 4.2 per cent in 2018 as Chinese investors pull out of the stocks on concern valuations are stretched and trading is too crowded.
Bocom’s Hong predicts the Shanghai Composite will trade around the 3,300 range this year, with at least six months or more under that level, as a cut in the reserve requirement ratio by 1 percentage point last month actually portends a slowdown in economic growth.
The Shanghai Composite dropped 1.4 per cent to 3,168.96 at the close on Wednesday, without having a chance to touch the 3,300-point gateway since March 13.
Still, a dull broader market may create buying opportunities for foreign investors as China is an inefficient market, with lots of individual stocks likely to move independently from the benchmark gauge, according to Huang Shumin, head of research for Greater China equities at JPMorgan Asset Management in Hong Kong.
“Foreign investors seem to be interested in those sectors and individual stocks with better earnings growth and yield relative to the market,” she said. “Most active managers have been gradually adding exposure to A shares for some time. This trend should continue as access to A shares eases further.”
JPMorgan expected a total of about US$50 billion from actively and passively managed stock funds overseas to flow into the mainland markets upon MSCI’s addition from June 1.
“The initial inflow isn’t big compared with the trillions of US dollars of China’s market cap,” said Gao Ting, a Shanghai-based strategist at UBS Group. “But the closer link with the global markets will bring about lots of positive behaviour changes to the domestic market, such as corporate governance, disclosures and market systems.”