Allianz Global Investors bullish on Chinese mainland-listed shares
Chinese shares traded on the mainland have underperformed their overseas-listed counterparts so far this year because of aggressive re-ratings in large-cap technology firms. But this could soon change, according to Allianz Global Investors.
Onshore shares may catch up because of the positive, sustainable outlook for Chinese companies’ earnings growth and given that the mainland market provides a much larger investible universe.
The forward price-earnings ratio of the CSI 300, which tracks the large caps listed in Shanghai and Shenzhen, is forecast to drop from about 16 times in 2017 to 13 times next year, according to Bloomberg data.
The valuations, which are similar to levels seen in the MSCI China large-cap index, will provide impetus for fresh flows of foreign capital into so-called A shares, yuan-denominated shares listed in the mainland, said Allianz Global Investors.
“In the past, people thought A shares were more expensive than the overseas market, but that is not the case any more,” said Anthony Wong, investment portfolio manager at Allianz Global Investors.
“The composition of the A-share market has many more new economy companies. So if investors wish to put their money where it will benefit from China’s economic structural transition, then A shares will provide more opportunities.”
The global market capitalisation of Chinese stocks is US$12.5 trillion, including those listed in Shanghai and Shenzhen that represent 70 per cent of the total. This potentially provides a lot of room for foreign investors to increase their exposure onshore since they are mostly holding Chinese stocks that are listed overseas.
Next year’s inclusion of Chinese blue chips in the MSCI’s emerging markets index may initially bring only about US$20 billion of new flows into the mainland market, analysts estimate.
Allianz Global Investors predicts corporate earnings growth in A shares of about 15 per cent this year and 12 per cent in 2018, while the small and mid-cap board, with earnings growth of at least 30 per cent, also provide opportunities after their valuations fell.
“Companies’ pricing power is likely to strengthen on improving operational efficiency and product mix,” Wong said, adding that he likes stocks in consumer, tourism, Chinese white wine sold to the mass market, innovative medicine and environmental.
The A-share market has risen almost 25 per cent this year, compared to the MSCI China’s 57 per cent gain, which was driven by new economy stocks including Alibaba and Tencent. Re-ratings pushed their price earnings to expensive levels of 40-50 times. At the same time, “old economy” stocks like banks, energy and telecom performed poorly.