China A-shares: Is now an opportune time to invest?
Summary
Which country’s stock market was more resilient than others during the COVID-19 pandemic? The answer may surprise many investors.
As of 15 May 2020, the MSCI China A Onshore Index (USD) fell 3% yearto-date (YTD), outperforming China’s offshore indices as well as the European and US stock markets. Mr Anthony Wong, Allianz Global Investors’ co-lead manager for Allianz China A-shares fund, explains the global stock market turbulence as primarily caused by the pandemic and the plunge in oil prices, but both have relatively limited negative impact on China’s A-shares market.
Foreign capital flows into A-shares despite COVID-19
While China was the first to face the COVID-19 outbreak, it was also the fastest to contain the disease, which has no doubt contributed to its stock market’s resurgence. As for oil prices, China is a crude oil importer, and the oil and gas industry accounts for a minimal proportion of the A-shares market. Hence, the energy sector had limited negative impact on the A-shares market.
More importantly, the A-shares market is dominated by individual retail investors, who are very sensitive to the Chinese government’s policies. Hence, when the state released economic stimulus measures, retail investors responded positively, contributing to the A-shares’ better YTD performance than other countries’ stock markets.
Moreover, the COVID-19 pandemic has not interrupted the trend of international capital inflow into A-shares through Stock Connect programmes. China is the world’s second-largest economy, but China’s A-shares makes up less than 1% in the MSCI World Index and merely 4% in the MSCI Emerging Market Index. As the A-shares’ weight in global indices is set to rise, it will become international investors’ go-to option for long-term asset allocation.
This year's global stock market crash highlights the importance of risk diversification. Retail investors, who account for 80% of the A-shares market’s trading volume, invest differently from international institutional investors. Therefore, the A-shares market has a relatively low correlation with the foreign stock markets, making it a functional device for risk diversification.
Mr Wong noted that as the A-shares market gradually opens up, its correlation with other stock markets will increase gradually, but the process will be prolonged. He believes the A-shares market will remain relatively independent in the coming three years.
A-shares gained 40% since Donald Trump’s inauguration
Going forward, Mr Wong believes the escalating US-China tensions will have minimal impact on the A-shares market. This is because US institutional investors’ A-shares holdings account for only 1% of the A-shares’ total market value. In fact, the repercussion of the US-China relations on China equities has been arguably overblown. From the beginning of Donald Trump’s presidential term in 2016 to April 2020, the MSCI China Index has accumulated a 42% gain, outperforming the U.S. S&P 500 Index’s 37%. Also, as China strives to reduce reliance on imported technology and electronic parts, it prioritizes homegrown research and development (R&D) and innovation. This benefits companies with relevant technologies, providing investors with brand new investing opportunities.
Capturing opportunities in a diverse new economy
Mr Wong added that, the COVID-19 pandemic has brought transformative changes to the mainland Chinese economic structure. In the past few years, there were still residents who were not used to online shopping or accessing electronic services. But during the nation-wide lockdown, many consumers have embraced digital technology and developed a habit of ordering daily necessities online. This has expanded the e-commerce industries’ customer base and offers potential opportunities for investors.
When compared to the Hong Kong stock market, the A-shares market features more diverse new economy sectors, such as 5G equipment, healthcare, biotechnology, industrial automation, new energy, and travel and entertainment, from which investors can capture enhanced returns from China’s economic restructuring.
1 Based on Allianz China A-shares Class AT (USD) accumulation share class. Source: Morningstar, as at 30/04/2020. Copyright © 2020 Morningstar Asia Limited (“Morningstar”). All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
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China - the journey continues
Summary
The strong rally in Chinese equities this year has been driven by a combination of domestic economic recovery post COVID-19 and strong liquidity with the return of ‘’animal spirits’’ among onshore retail investors. While the rally may have gone a little too far too fast, and some consolidation would be healthy, we see this as a very different situation to the boom-and-bust experience in China A-shares in 2015.
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