Chinese A shares offer diversification amid global market volatility, says JPMorgan Asset management

Lower correlation with global markets means influence of weak US stocks is limited

PUBLISHED : Friday, 09 February, 2018, 9:00am
UPDATED : Friday, 09 February, 2018, 9:00am

Mainland China shares have a lower correlation with global equity markets than their so called H-share counterparts in Hong Kong, and represent an opportunity for diversification when US stocks are weak, according to Tai Hui, Asia chief market strategist at JPMorgan Asset Management.

Global investors often think the Chinese A-share market is volatile and dangerous because of an investor base that is not particularly mature. However, the correlation between global equities and the yuan-denominated A-share market is about 20 per cent, well below that of Hong Kong’s Hang Seng China Enterprises Index, which is about 50-60 per cent, said Hui.

“It sounds strange but if we are expecting the global markets to be more volatile this year, A shares can potentially offer some degree of diversification,” Hui said. “Foreign investors can take advantage of the low correlation relative to global equities.”

The Chinese domestic market has its own dynamics because it is largely closed with no global benchmark, and no direct link with international flows. Foreign participation will gradually increase as China opens up, but for the time being it still offers some degree of diversification, said Hui.

In the past year or so, Chinese investors have been inundated with regulatory tightening in the banking sector over the shadow banking system and wealth management products.

As a result, the performance of A shares has lagged behind Asian markets despite earnings improvements in A shares, Asia shares and H shares showing a similar magnitude. There is no reason to pick one market over the other if it was not because of the difference in investor base.

Chinese investors are likely to feel more comfortable with equities going forward because earnings are improving, Hui said, adding that sectors in technology, health care and education will benefit from China’s changing consumer behaviour.

In contrast, banks’ profits and earnings growth in China remained constrained by tight credit spreads, lending being very carefully managed and wealth management products being scrutinised, Hui said.

Macquarie Bank said that financial deleveraging would also cause smaller banks to face more pressure. Meanwhile, postponing difficult reforms will reduce productivity gains in the financial sector.