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Taming China’s stock market

Foreign buyers and Chinese institutional investors with long-term horizon bring stability and efficiency to Chinese stock market, argues Greg Kuhnert, portfolio manager at Investec Asset Management.

“Historically, A-shares tend to have a low correlation with global markets,” Kuhnert told FSA. “That is mainly because the market is driven by retail investors and they tend to behave differently.”

As domestic institutional investors and foreign buyers play an increasing role in the market, the correlation should go up and market efficiency should improve, he argued. 

Kuhnert, who is based in London, manages the Investec All China Equity Fund. The fund tracks MSCI All China Index, a rare choice for China equity funds. At the end of June, the index consisted of 58% A-shares, 31% Hong Kong-listed stocks (H-shares) and 11% Chinese companies listed in the United States and Singapore.

The fund currently holds about 43% in A-shares and is overweight in H-shares. The fund’s active share, which measures the percentage of the fund holdings that deviate from the benchmark, stands at about 80%, Kuhnert said.

The fund looks to increase its A-shares exposure from the current level. “We are looking for high quality companies that are favoured not only by foreign investors but also the institutional investor base,” Kuhnert said.

“For the last two years, the valuation of the A-share market has been more expensive,” he said. “Earnings have also been downgraded, because the expectations had been too high.” 

The situation has been changing recently, he noted. “The A-share market’s valuation is looking more attractive now after two years of underperformance,” he said.

The recent global decline in volatility was reflected in A-shares as well, he noted. 

Schroders also sees more opportunities in the onshore equity and bond market as compared to those listed offshore, as reported earlier.

Broadening focus

Foreign investors tend to focus on a few names, which frequently appear as top holdings in Chinese equity portfolios, including the Investec fund, noted Kuhnert. Examples include the home appliance maker Midea Group, or the alcoholic beverage producer Kweichow Moutai.

“There are bigger names that everyone’s starting to look at,” he said, adding that it will take time for foreign investors to become comfortable with smaller companies.

Kuhnert pointed out that the level of engagement of Chinese companies with foreign investors had significantly improved during the past three years. While most investor presentation materials were in Chinese only, and foreign investors had to rely on external interpreters during company meetings, this is not the case today.

However, the regulatory 30% limit of foreign ownership in mainland companies means that the influence of overseas investors is contained, he noted.

“The bigger story is about the domestic institutional investors,” he noted. They are mainly big insurance companies focusing on long-term investing. They are hoped to change the casino-like behaviour of both retail investors and onshore mutual funds, which usually have a high turnover of three to four times a year.


Performance of the All China Equity Fund since inception in June 2015

Note: The benchmark MSCI All China Index is not available. The fund is the best performer on the rolling one-year basis among all China equity-focus funds registered for sale in Hong Kong, FE data shows.

Part of the Mark Allen Group.