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Has China’s A-share market really taken off? Five experts weigh in

The Shanghai Stock Exchange is made up primarily of retail investors (83%) while institutional investors are a minority (17%), UBS research shows.

Has China’s A-share market really taken off? Five experts weigh in

The coronavirus pandemic has affected the whole world, but will China’s speedy recovery give it the edge as global markets reopen? We spoke to five investment experts.

Roundtable participants:

Jansen Phee, Head of funds investment solutions, Apac UBS Wealth Management

Belle Chan, Senior investment strategist, Standard Chartered Bank

David Choa, Head of Greater China equities, BNP Paribas Asset Management Hong Kong

Ken Peng, Head - Asia investment strategy, Citi Private Bank

Grace Tam, Chief investment advisor, Hong Kong BNP Paribas Wealth Management

Chairperson:

Audrey Raj, Editor, Asia


Audrey Raj: What types of funds or strategies are likely to serve you well in China in the coming months?

Jansen Phee: We like equities as a strategy play in China. What Covid-19 has done is to accelerate the importance and attractiveness of long-term trends that we have seen develop over the last few years. Trends like the focus on Healthcare, especially with technology elements embedded, would clearly prove to be beneficial. Other equity plays related to digital/technology related areas like fintech, ecommerce, and even online gaming would prove attractive. Another key opportunity is 5G which has significant economic consequence for China. Again, this is tied our tech play - a good infrastructure is needed to be able to accommodate the digitalisation trend that we are witnessing. We believe China is likely to accelerate the rollout of 5G in China.

Grace Tam: We want to play the China domestic recovery story, but at the same time there are several risks that we should be concerned about, like rising geopolitical tensions or a second wave of virus. On one hand, we recommend playing the beneficiaries of domestic recovery, on the other hand, we also should keep a close watch on defensive strategies just to diversify or to hedge with some quality dividend stocks and/or corporate bonds.

Structured products of quality stocks could be a good defensive strategy, and investors could also consider structured products on those sectors which may benefit from domestic recovery, like real estate. China real estate bonds have already seen a perfect V-shape recovery.

Ken Peng: We have been talking about unstoppable trends including tech, healthcare and Asia’s consumption development. We continue to believe that these trends will survive and continue to do well. They have done extraordinarily well especially, the first two, during this crisis and we think they will continue to do well over the longer run. At the moment, we’re exploring a lot of funds that dedicate to these themes, but more recently, we’re exploring ideas such as if you’re a healthcare provider and you make drugs related to respiratory disease or protective gear, then you’re way in the money. If you made anything else, you’re out of money and treatment for other conditions and diseases just went over a cliff. Now, if there is reopening, then these parts of healthcare will probably do better than the ones that have already benefited.

Audrey Raj: Has the A-share market taken off or do you think investors need other alternatives to access the Chinese market?

David Choa: Historically, A-shares are a very retail driven market. It has become more mature in many aspects because the institution participation rate is getting quite high. At the same time there are also some recent interesting developments in the market as a whole. It’s not only limited to A-shares. As an investor, I would not care where the alpha is coming from, onshore or offshore. We’ve seen the return to the Hong Kong market, and we may also expect an increase rate of new emerging companies in the tech space, in the healthcare space and therefore more interest to list in the offshore market. A-shares are definitely taking off, but then with the best investment strategy, we should look at all China.

Belle Chan: The market has matured a lot and in terms of the valuation, it has come down to quite realistic levels. Before, it was very high and dominated by small-caps, but now we have the blue chips and they are trading at rational valuations. Over time, with more money going into the China market, we could see a more sophisticated and mature market with more rational behaviour.

Jansen Phee: I am of the view that the A-share market, by and large, has taken off. However, we do still see certain challenges, especially when it comes to sourcing funds to express an investment view. A lot of the funds we encounter are generic A-share equity funds and we struggle to find funds that play specific themes or sectors because of size of universe and liquidity reasons. Furthermore, our research shows that if you look at the Shanghai Stock Exchange (as an example), it is made up primarily of retail investors (83%) while institutional investors are a minority (17%). This will give rise to complications like unnecessarily excessive volatility due to the investment characteristics of retail investors. If you compare that with Hong Kong, where it’s 35% retail and 65% institutional, it’s almost a complete flip. From that perspective there’s still some room to go from a maturity perspective.

Audrey Raj: What are these sectors or types of companies you are looking at?

David Choa: Number one sector is technology. China is highly dependent on the US for many of the core components, but at the same time, compared to the past, China is not starting from zero.

We have a large talent pool, not only are they very reasonable in price, they work hard, they are talented. China will definitely catch up. We’re seeing many national champions in this field gaining market share against the foreign giants. They could be companies starting from one theme, but then merging to another one, or they can actually span across all of the themes at the same time. It’s a very exciting market in China. Things are moving in all directions at the same time.

Audrey Raj: What about the sectors that you’ll be avoiding?

Grace Tam: We are underweight China banks and utilities. The Chinese government actually urged banks to cut or sacrifice profit to support the enterprises, as well as lowering interest rates.

Utilities are more defensive and also there are headwinds of regulated returns by the government. We also find utilities less attractive compared to the other sectors.

Belle Chan: Everybody is waiting for the recovery, but the global recovery will probably take a while because there are still countries struggling to manage the rising infection cases of Covid-19, like in Latin America. The mining sector will be cautious except for gold miners, but for the other base metals which are produced a lot in Latin America like in Brazil, the demand really depends on China industrial production and if global demand is slowing down amidst a gradual recovery in China, we expect metals and mining sector could be one of the last few sectors to recover.

Audrey Raj: On the ESG scene in China, do you think that transparency or better reporting is still a concern?

Jansen Phee: I think there is still some way to go with regards to ESG in China. While greater transparency and better reporting is a concern, the bigger concern is that there is no standardised framework or guidelines for ESG disclosure in China. This is different compared to most developed markets outside China where there are generally agreed standards for ESG disclosure. However given time, I do believe China will be able to address this issue. It is an educational and mindset-change process. The rest of the world did not just arrived at where we are on ESG issues overnight. It took us a while and you could argue that even now not all of us outside China are on the same page yet on this topic.

David Choa: Many companies that we closely engage with have started to report on ESG. Most of them still report in Chinese, but some of them have already published ESG reports in English. It’s still very early, but it is going in a positive direction. At BNP, we have an internal sustainable centre. We have real experts on the ground that help us to guide this process to reveal the true reliability of these companies and if it matches the numbers provided by the third-party vendors.

Grace Tam: We have witnessed a lot of improvements over the years in terms of building ESG awareness and company’s disclosure. Two factors are attributing to this development. One is the global institutional demand. The second factor is the regulators who are also doing more in terms of encouraging companies to disclose. At BNP Paribas Wealth Management, we have developed a ESG rating methodology for securities. It’s from zero to 10 where zero is no integration and 10 is full integration. We could find stocks with a significant integration of ESG elements. They’re not only limited to one or two, but a variety of sectors like transportation, online consumer, online media, online entertainment, materials, consumer.

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