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.
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.
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.