Cyrus Mui, Vanguard
Companies listed on the mainland account for 70% of the capitalisation of the Chinese equities markets, followed by those listed in Hong Kong, the US and Singapore.
“If you think about the performance of all these share classes for the past 10 years, there is no pattern at all,” Mui said at a media briefing in Hong Kong yesterday.
For example, Hong Kong-listed P-chips were the best performers in four out of ten most recent calendar years, while China-listed A-shares, the most popular share class for Hong Kong and Asian investors, performed best only once, in 2014.
“It is almost impossible to predict what will be the best performing share class in the future,” Mui said. “If you think about Chinese government policy, you will never know which share class will benefit the most.”
He added that there are differences in terms of the kinds of companies that could be found in each share class. Mainland-listed A- and B-shares are the group with the widest range and variety of companies. In H-shares, listed in Hong Kong, a lot of Chinese giants can be found. N-shares are US-listed Chinese companies, which include many technology and healthcare companies.
Because of the differences among these share classes, Mui believes that investing across all share classes can help investors minimise the downside when a particular share class underperforms. In addition, it gives investors a better representation of the whole Chinese equity universe.
An ‘all share’ approach
Vanguard launched yesterday its first China-focused ETF, which invests across all share classes, as reported previously. The ETF tracks the FTSE Total China Connect Index, which covers 1,100 large- and mid-cap Chinese stocks in all major share classes listed in or outside of China. However, the ETF will only invest in 800 names, Mui noted.
Mui wants investors to understand that the new product is different from the other China-focused ETFs available in Hong Kong.
“If you look at the Hong Kong ETF market, you can see that most products will only invest in one share class,” he said. “We have A-share ETFs and quite a lot of offshore Chinese equity ETF products, such as H-share ETFs.” However, there is no ETF product that actually invests across the different share classes in the China equity universe, he added.
In Hong Kong, there are 40 ETFs that invest in Chinese companies, according to the Hong Kong Stock Exchange. Twenty-nine of them invest in mainland-listed companies, nine in Hong Kong-companies and two in companies listed in both jurisdictions.
Wang Qian, Vanguard’s managing director and chief economist for Asia-Pacific, acknowledged that Chinese equities are more volatile when compared with developed market equities.
Wang Qian, Vanguard
“Many investors are sceptical about investing in China, and they quote the higher investment risks and volatility,” Wang said during the media briefing.
However, Wang reminds investors that China, despite being the second largest economy in the world, is still an emerging market. “If you look at China’s volatility, it is comparable to other emerging markets, and that is why you have lower valuations.”
She believes that investors are compensated for taking that risk and should expect higher returns in the long-term, compared to investing in developed markets.
She also added that China’s equity market returns have low correlation with those of other countries. “That reflects the improving economy of China, which is mainly driven by domestic demand.”