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Why China A-shares are underperforming

Why China A-shares are underperforming

JP Morgan Asset Management outlined three broad factors that caused the recent volatility in the Chinese equities market.

The reversion to more normal levels of volatility following a period of exceptionally low volatility during which Chinese A-shares investors had grown complacent is one of the main reasons, + rated manager Howard Wang told Citywire Asia.

Trade frictions between US and China have also contributed to negative sentiments for China A-shares. What's more, the disappointing corporate earnings in Chinese technology companies.

These factors converged to cause a sell-off in growth stocks and more specifically cause weakness in Chinese exporters, the head of Greater China equities said.

On US-China’s trade tensions, Wang said: ‘It’s in the interest of both countries to resolve negotiations and we see that reflected in China’s measured stance on both trade and intellectual property.’

Currently, more than 40% of China’s exports are on behalf of multinational corporations, many of which are US-domiciled. Meanwhile, China is an outsized holder of US debt given its current account surplus.

Meanwhile, some of the negative headlines – such as disappointing iPhone sales – are now being confirmed in the earnings statements of Chinese companies, allowing expectations to be reset, he said.

This doesn’t mark the end of the innovation cycle, however, Wang said.

The powerful secular growth trends in China technology remain intact, and the tech narrative is moving beyond the smartphone and into artificial intelligence, big data and other exciting growth areas, he added.

‘The overall picture of Chinese A shares earnings is still relatively strong.'

On the recent volatility in Chinese A-shares, Wang said: ‘Volatility will normalize and if we ignore the noise, China remains a compelling long-term growth story, fuelled by powerful trends underlying China’s economic rebalancing and its development of high value-added industries.’

‘As China rebalances, we expect the economy to slow gradually over the long-term, as part of the reality of China’s transition to a middle income country on per capita GDP growth basis,’ he said.

‘In the context of slowing GDP, we can still expect to see strong corporate earnings growth, which is the real driver for equity market returns.’

Wang said the China A-shares market has a tendency to undershoot on the downside and overshoot on the upside – higher volatility is a feature of this developing and highly liquid market.

‘Rather than fixating on short-term gyrations, we would suggest to investors that China A-shares should be delivering healthy double-digit returns over the long-term.

‘By the end of this year, we think this will be viewed as a transient correction moment in a sustained bull market that remains supported by powerful fundamental growth factors,’ he added.

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