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A-shares access: top managers clash on China strategy

A-shares access: top managers clash on China strategy

The opening of the Shanghai-Hong Kong Stock Connect in November last year has helped propel a huge upswing in the A-share market as investors seek to tap Chinese mainland stocks.

The policy, known as the ‘through train’, was viewed as a pivotal moment in China’s long-discussed internationalisation plans.

But, with the A-shares market up over 50% in 2014, is there long-term, sustainable growth in accessing A-shares or is the initial euphoria likely to wane and potentially suffer a sharp snapback?

King Lee Fuei, head of Asian equity at Schroders, last week said the market was ‘clearly in a bubble’, as trading volumes began to dwarf their H-shares counterpart, but is the Citywire A-rated manager alone?

Citywire Global has talked to lead fund managers and collated commentary pieces to uncover who is positioning for a positive turn and which sceptical investors are steering well clear for fear of the ‘through train’ derailing.

FOR - Victoria Mio, Robeco

The Citywire + rated manager believes the market is of such huge size and importance it will be impossible to operate without it, even if there is some volatility afoot.

The Shanghai-Hong Kong Stock Connect allows Chinese financial markets to be an integral part of the global financial markets. The combined A and HK market is simply too big to ignore.

It is the second largest equity market in the world by market cap, the third largest by turnover and the second largest by number of listed companies. There is a big divergence in returns between Chinese local and offshore equity markets.

The high return on A-shares was not matched by offshore equities (as in the MSCI China), but Mio thinks they will play catch up with A-shares, this year.

In 2014, offshore Chinese equities were dragged down by outflows in emerging markets. In 2015, we expect offshore Chinese equities to gradually catch up with A-share markets as valuations remain reasonable.

Unfortunately, the bull market is unlikely to be linear, with the volatility seen in 2014 persisting. After gains of close to 53% in 2014, the A-share market may need some time to digest these gains in early 2015.

AGAINST - Thomas de Saint-Seine, RAM AI

The Swiss group’s chief executive officer has Chinese exposure in his $2.2 billion emerging markets fund but is staying well out of the ‘highly speculative’ A-shares market for now.

We are not going into the A-shares market because we are sceptical over the long-term potential here. This is why we tend to focus on the H-shares market, as we can see there is a clearer way to access the Chinese market without the speculation you see in the A-shares market. We are not hugely excited about the opportunities there.

One of the main problems we have encountered when investing in China is the level of internal speculation. At the end of the day, with where the market has gone in A-shares, there has to be a correction and the premium versus H-shares is currently very high.

At the moment, going into A-shares is a bit like stepping foot into a casino, as there is no realistic outcome of how much they can go up and how much they will come down when they do ultimately come down.

FOR - Lan Wang Simond, Pictet

Another manager worried about volatility but ultimately impressed is long/short equity specialist Lan Wang Simond. The PTR-Mandarin manager thinks it is an important growth story.

The Chinese market is indeed prone to erratic price moves. This volatility was most recently evidenced in early December, when the Shanghai Composite index rallied to a 3-1/2 year high only to sharply reverse course later in the day to post the biggest daily percentage decline in five years.

In a way, China’s stock market is at the same stage in its development as Taiwan’s was in the early 2000s, when share turnover velocity was as high as eight times the market's capitalisation, in a market dominated by domestic retail investors. The velocity has since fallen as more institutional investors participate in trading.

In our view, diversifying the investor base represents a key phase in the evolution of the Chinese market. This is because it would lead to a more sophisticated market where prices are driven less by momentum and more by data and value-based analysis. We believe this would make it more attractive to foreign institutional investors.

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