Opportunities in A-shares
January 31, 2020
MSCI added China A-shares into many of the key global indices for the first time, which will undoubtedly boost foreign interest in this under-owned and under-researched equity investment class. With more than 3,300 listed companies and a total market cap of around $7.8 trillion, the China A-shares market represents a vast, untapped opportunity.1 It’s hard to imagine a bigger market with this much potential, anywhere.
The A-shares market is large and liquid, but highly inefficient in our view—and therein lies both the dangers and the opportunities. It may be the only large stock market in the world in which individual investors account for the vast majority—we estimate about 80 percent—of daily trading volume.2 In more established markets, retail investors are less influential on the market movement.
The result is big swings in stock prices, and unusually high dispersion in valuations. Because this kind of investment pattern tends to be more short term oriented and driven by newsflow, they can derail passive buy-and-hold strategies, and create opportunities for active managers. Moreover, in the A-shares market, even most of the institutional investors act more like retail investors by trading constantly.
A market this immature and diverse also offers frequent opportunities to buy or sell stocks that are overlooked or misunderstood. We have seen numerous instances in which local A-shares investors could not or did not do simple homework: failing to meet with a company and understand the earnings implications of an overseas acquisition or new expansions, or failing to meet with new management. This opportunity does not exist to the same degree for companies in the MSCI China Index, which are typically larger, more transparent and more closely covered by analysts.
Within our focus on the “new” China, we are tracking a few key themes, built around companies that are deploying a new generation of skilled workers, and companies that are catering to them as consumers. As cheap, skilled labor displaces cheap labor in the Chinese economy, incomes are rising in sectors from industrials to consumer companies, and demand is rising in sectors such as tourism, luxury goods, toys and games, and beauty care. All these sectors are well represented in the A share market. And since Chinese consumers still spend much less on average than their counterparts in the rest of the G20, there is still plenty of room for the consumer sectors to grow.3 That adds to the excitement and appeal of the A-shares market.
We remain focused on looking for the best investment ideas and for companies that will benefit from the multi-year structural story that is China. While the market over the longer term will become more efficient, we believe ample opportunities exist for active managers to capture extra idiosyncratic alpha return from the market.
1 FactSet, Wind, Goldman Sachs Research as of January 31, 2020.
2 MSIM, Citi Research as of January 2020.
3 World Bank, Euromonitor, Citi, as of August 2019.
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The MSCI China Index captures large and mid-cap representation across China A-shares, B-shares, H-shares, Red-chips and P-chips. It reflects the Mainland China and Hong Kong opportunity set from an international investor’s perspective.
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