Understand the risks inherent in China’s equities, and take a long-term view

Trade disputes and political disagreements have raised tensions between China and other nations. China’s markets and economy are also subject to state influence, and sudden changes in policy direction can change the business environment. China’s government is making a long-term effort to reform and open up their markets, including by implementing constructive new regulations. But there are still risks involved, which reinforce the need to be active and have a long-term perspective.

For example:

• A-shares were subject to a high number of stock suspensions in the past, though suspensions are now near historic lows.
• Volatility in China’s A-share market has gone up and down: 39.8% in 2015, 10.7% in 2017, 21.5% in 2019.

A-share stock suspensions have fallen significantly

Stock suspensions vs market cap, 2015-2020

Source: Wind, Goldman Sachs Global Investment Research. Data as at 20 Feb 2020.

Aim to understand each stock’s risks

Risk management should be a top priority for investors, especially in today’s climate. When investing in China, asset managers may want to monitor how much risk each stock contributes to mitigate excessive risk from any one company – and seek to generate alpha (excess performance over the benchmark) from a wide range of positive stock contributors rather than concentrated bets.