“We’re quite constructive on China A-shares and we see a lot of potential. What’s growing in terms of technology in China, the steady opening up and the [A-share] inclusion on global indices are positive long term stories,” Evan Brown, head of macro asset allocation strategy of UBS Asset Management, said at a recent media briefing in Hong Kong.
Brown particularly likes China’s onshore technology sector, which he believes has a reasonable chance of outpeformance versus other sectors.
Furthermore, he argues that China technology A-shares are undervalued compared with US tech shares, and “[therefore] have significant upside potential from current levels.”
In a broader picture, he said the firm is positive on emerging markets as a whole. “China H-shares, Korea, Taiwan, all these areas are poised to gain from the global rebound that we expect over the first half [of next year].
“These areas are very tied into global manufacturing. As long as global manufacturing is healing, we expect these emerging markets and sectors can do quite well.”
The UBS China A Opportunity Fund, managed by Bin Shi, is up 86% over the trailing three years, beating both benchmark and sector (chart below).
In terms of risks, Brown cited a prolonged or worsening trade war and technology restrictions, real and potential, referring to the ban on Hua Wei 5G technology imposed by the US and other countries.
“There are more concerns about [technology] restrictions like we’ve seen, and that could increase over time.”
General market expectations are that a phase one agreement in the US-China trade dispute will be reached in the coming weeks or months. Brown believes the trade conflict will now pivot toward other issues.
“Trade is going to become less of a focal point of the conflict, with less use of tariffs [as a weapon].”
Nonetheless, the firm’s A-share recommendations are an overweight on technology and consumer discretionary stocks, but an underweight on the financial sector.
Expectations are rising, perhaps too high, as many firms come forward to express optimism on A-shares in 2020.
Besides UBS AM, Allianz Global Investors has also joined other asset and wealth managers who are optimistic on China A-share stocks. DWS and Value Partners are among the bulls, and so is Hang Seng Bank’s wealth management division.
“In May of this year, the trade war heated up again and tariffs were imposed, but A-shares were stable,” Anthony Wong, Allianz GI portfolio manager said previously. “This reflects that investors have absorbed the negative effects of the dispute.”
“If a trade agreement is reached, it is certainly better, but if it is delayed, the negative impact on the [A-share] market will be limited,” Wong said.
However, Kevin Anderson, head of investments in Asia-Pacific at SSGA, is outside the pack of bulls, sort of.
Though overweight A-shares, he explained the firm was “not significantly overweight”, singling out the trade dispute as a major concern.
“The risk is that there will be no phase one deal and [then] how long the status quo will remain.”
The UBS China A Opportunity Fund vs sector and benchmark