“The estimation is mainly based on the fact that in the past few years, foreign investments have a certain underweight of A-shares. However, as part of the US-China trade dispute has been resolved and the Chinese economy is becoming stable, the under-allocated capital will slowly come into China,” Meng Lei, A-share strategist at UBS Securities, said yesterday during a UBS event in Shanghai.
He expects around RMB 200bn of under-allocated capital to flow into A-shares this year. Additionally, inflows should come from higher global asset allocations to emerging markets, “including the preference of some Hong Kong-registered hedge funds for A-shares, thus we have a forecast of RMB 300bn”, he added.
Meng further noted that the figure is all active capital because at least for now, MSCI has decided to pause its inclusion of more A-shares on its global indexes.
The index provider said previously in a statement that only if China addresses four major problems (lack of hedging tools and derivatives, China’s short settlement cycle, the onshore market’s holiday misalignment with Hong Kong and a lack of mechanisms allowing brokers to place a single order on behalf of multiple clients), it will consider the further inclusion.
Recovery and risks
Meng believes that the Chinese economy will experience a quarter-on-quarter recovery in the first and second quarters.
Despite the expected signing of the phase one agreement, he doesn’t believe that US-China trade volumes will substantially improve nor worsen. Therefore, the mainland is unlikely to experience large outflows of foreign capital.
“The outflow of foreign capital is more driven by macro factors, including the devaluation of the RMB and the US-China trade dispute.”
However, several asset managers, such as Western Asset, have cited the US-China trade dispute as a key investment concern.
Desmond Soon, Western Asset’s head of investment management in Asia ex-Japan, remains wary of improving relations between the two countries and said to expect market volatility in 2020 as the trade negotiations continue.
“The deterioration of US-China relationship could be a major concern because they are two economic, political, and military superpowers,” he said previously.
Parent firm Legg Mason said it does not have positive expectations for US-China trade relations because neither side seems to be conciliatory and “escalating tensions and uncertainty will continue to weigh on sentiment, leading to further drags on capital expenditures and consumer confidence”, FSA previously reported.
Moreover, HSBC Global Asset Management warned on A-share volatility.
“In 2019, the China A-share market is up about 28%, but last year it fell about 30%. So it means that whatever you gained this year is making up for the downturn last year and if markets go up too fast or fall too fast, we tend to get a bit worried,” Sanjiv Duggal, head of Asian and Indian equities at HSBC Global AM said previously.
