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Selective China share investing can offset the risks of an opaque market

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Selective China share investing can offset the risks of an opaque market


Companies that offer services to China's growing middle class, along with tourism and environmental technology are areas where growth prospects can be easily seen, the investment bank says


International investors wary of Chinese domestic shares because of the opaqueness of the market and its vulnerability to global tensions may want to consider a thematic approach to unlock pockets of value, according to Morgan Stanley Investment Management.

The A-share market offers more than 3,000 stocks, meaning there are opportunities to find companies with attractive valuations and growth potential, potentially delivering strong returns and market outperformance, according to Paul Price, London-based global head of distribution at the investment bank's asset management unit.

"From a portfolio perspective, investors may want to find active managers making discerning judgment calls between the different pockets of value and trying to concentrate on the most lucrative areas," Price said during a visit to Hong Kong last week.


Paul Price (left), global head of distribution for Morgan Stanley Investment Management, and Gary Cheung, managing director at Morgan Stanley Asia and China A equities portfolio manager, suggest a selective approach to investing in Chinese stocks. Photo: Jonathan Wong


Even though global stock index provider MSCI decided last year to include 222 Chinese A shares in its Emerging Markets Index, using a two-step process beginning on June 1, many global investors are wary of issues including the quality of corporate governance at companies, as well as the retail investor driven nature of the market that causes volatility and the impact of global political problems such as trade tensions between China and the US.

Nevertheless, the attraction of the market to investors is growing, and investors can succeed if they are selective.

"There is a growing propensity for the need to have a stand-alone investment in China A shares as a portfolio allocation to one of the fastest growing economies in the world," Price said.

The attraction of the market to investors is growing and investors can succeed if they are selective.

Gary Cheung, managing director at Morgan Stanley Asia and China A equities portfolio manager, said he liked Chinese consumer discretionary, consumer staple, health care and technology companies that cater to the nation's expanding middle class, an investment theme that is very strong and long lasting.

Cheung also likes companies targeting new trends around environmental protection and domestic tourism, while companies that provide software and IT tools for courts and prosecutors to enhance the productivity and efficiency of the legal system may also do well, given China's focus on the development of the system.

Morgan Stanley's A-share funds have seen returns of 19.3 per cent since they began in 2006, compared to 12 per cent for an aggregate of all its China equity funds. Over the past five years the returns have been about 22 per cent versus the aggregate benchmark's 8.6 per cent.

Karen Yeung

Publication date: 4/29/2018

The article was originally published in South China Morning Post on April 29, 2018.

The opinions expressed in the article are those of South China Morning Post and Morgan Stanley Investment Management as of April 29, 2018 and are subject to change at any time due to changes in market or economic conditions and may not necessarily come to pass. The comments are for informational purposes only and should not be construed as a recommendation of individual holdings or market sectors. The material does not purport to address the financial objectives, situation or specific needs of any individual reader. The use of this article is not a solicitation, or an offer to buy or sell any security or investment product. Moreover, the opinions expressed in this article are not necessarily those of Morgan Stanley or its employees.


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