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China set for A-Shares revolution, says equity manager Yao

China set for A-Shares revolution, says equity manager Yao

Opening up the China A-Shares to international investors will prompt an historic revolution for the country’s marketplace and attract a significant amount of foreign capital.

This is the view of Citywire + rated manager Frank Yao, who runs the Neuberger Berman China Equity fund.

Speaking to Citywire Global, Yao said the liberalisation of the financial markets, along with low valuations and good corporate earnings, will increase international appetite for the Asian country.

‘Beginning this coming October investors trading in Hong Kong will be able to access stocks listed in Shanghai without the "Qualified Foreign Institutional Investor" quota,' Yao said.

'Shanghai investors will also be allowed to invest in Hong Kong listed companies. This may open many opportunities to the international community as well as contribute to a re-rating of China A-Shares.'

Yao thinks foreign investors are particularly attracted by the cheap valuation and the variety of opportunities offered by the Chinese market.

‘International institutional players are usually long-term, value investors looking for good fundamentals. This approach will influence our domestic A-Share market and drive the future corporate strategies,’ he said.

Bubbles and better bets

As international investors are becoming increasingly concerned about bubbles in the Chinese property sector, as well as excesses in the credit and shadow banking spaces, Yao believes these worries are exaggerated.

On the real estate side, Yao thinks some areas, such as tier 3 and 4 cities, might be vulnerable, but the overall system is still sound.

‘Mortgages as a percentage of total bank loans are relatively low. Also, Chinese people traditionally purchase homes with cash or high down payments,’ he said.

Discussing financials, Yao said China's shadow banking system only represents 26% of GDP, far lower than in the US and Europe.

The same applies to the country’s debt levels, which, according to Yao, remain moderate versus other major markets. ‘We will see defaults happening in the next couple of years, but this is part of a normal market dynamic, ‘ he added.

Overweight autos and healthcare

Currently Yao has a strong overweight to consumer discretionary stocks in his fund. ‘We like automakers like Dongfeng Motor Group because of the significant earnings' growth and the strong demand for cars coming from Chinese people,’ he said.

The manager is also overweight healthcare, as he said the sector is benefitting from incomes’ growth and lifestyle improvements. Yao returned 6.9% over the past three years, while the MSCI China TR USD rose 2.99% in USD over the same timeframe.

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