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Running with the A-share bulls

Allianz GI puts forth its optimistic outlook for the highly volatile A-share market.
Anthony Wong, Allianz Global Investors

Allianz Global Investors has joined the growing number of asset and wealth managers who are optimistic on China A-share stocks. DWS and Value Partners are among the A-share 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,” said Anthony Wong, Allianz GI portfolio manager, at a Hong Kong media briefing yesterday. “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 market will be limited,” he added.

The firm also believes that because most A-shares are domestically-focused, corporate earnings on average will remain resilient in 2020.

“The dependence of A-share companies on overseas business is very low. For companies on the MSCI China A-share Index, China accounts for 88.9% [of company revenue] and the US accounts for less than 3%, which means they are less affected by the trade war,” Wong said.

However, the A-share market has very high volatility. Last year, the CSI 300 Index, which includes 300 of the largest A-shares listed in Shenzhen and Shanghai, plunged 27% and year-to-date it made a full reversal to 28%. A multi-year look underscores the wild swings of A-shares:

CSI China Securities 300 Index
2019 YTD 28.63
2018 -27.57
2017 32.60
2016 -15.21
2015 2.43
2014 52.08
2013 -2.57
Source: FE Fundinfo. Annual return in US dollars.

This is partly because the market is retail-investor driven, but China has also been described as a policy-driven market, with changing government policies causing extreme volatility.

Wong obliquely highlighted these risks. “The swing of the Chinese stock market is mainly driven by policy changes.

“Sometimes, it’s not really about the policy itself, it’s about investors’ risk perception about the policy changes. Next year, we still have to closely monitor the situation regarding any potential policy or regulatory changes in the A-share market,” he added.

He also acknowledged as important China’s slowing GDP growth, which he estimates will be 6% or slightly lower next year. Slowing domestic growth will no doubt have an impact on domestic consumption-related A-shares. 

“China is transforming from the world’s factory to one driven by domestic demand, and this will cause a relatively stable and slow GDP growth. However, the growth will be more sustainable,” he added.

Stock selection

Wong c0-manages two China-focused funds, the Allianz All China Equity Fund and the Allianz China A-Shares Fund.

“We do not make aggressive top-down market or sector allocations, we focus on stock selection. And we also have the flexibility to invest in off-benchmark stocks. So basically, we do not have any market-cap bias,” he said.

“When we pick stocks, we focus on three major criteria: growth, quality and valuation. So on average, we pick up higher earnings growth names that are under-appreciated by the market and trading at an attractive price-to-earnings level,” Wong added.

Currently he is underweight the financial sector “because in such a slowing economic situation, probably the financial sector will be under pressure”. The fund factsheet for the A-share fund shows that he is also underweight materials, energy and real estate sectors.

Wong is overweight the consumer staples and discretionary, information technology and healthcare sectors, which includes innovative pharmaceutical companies and some niche markets or sub sectors within industrials such as companies in industrial automation and the electric vehicle supply chain, he said.

Allianz China A-Shares Fund vs benchmark and sector

Source: FE Fundinfo. Three-year cumulative return in US dollars. Note: The fund uses the MSCI China A Onshore Index as a benchmark. The CSI 300 is included for reference.

Part of the Mark Allen Group.