Spotlight
There are a number of paths to accessing China A-shares. Generally, the vast majority of the investable universe remained inaccessible until the launch of the Hong Kong Stock Connect programs. Although widely popular, these entree points provide only partial access. Chinese regulators have granted us the authority to trade A-Shares locally, granting us full market access to the complete security universe.
Brief observations on the China A-shares market.
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For decades, China has been slowly opening its economy and capital markets to the rest of the world. The 1990s brought the opening of trade and establishment of capital markets, specifically the establishment of the Shanghai and Shenzhen stock exchanges. At the time, these new exchanges served an economy that reflected 3% of global GDP (versus approximately 15% today in nominal or current price terms).
Since then, China has experienced tremendous economic growth and is now the world’s second-largest economy by nominal GDP. Today, China is the leading contributor to global growth, outpacing the U.S. and contrasting sharply with its prior modest contribution. Below are our latest perspectives on how this evolution has continued and the opportunities that have emerged.
Just over a year ago, Acadian launched a dedicated China A strategy, offering investors access to the onshore Chinese equity markets. Acadian has been granted access through the RMB Qualified Foreign Institutional Investor (RQFII) program, providing the broadest possible access to this evolving and dynamic market.
In this post, our team reflects on the impetus behind Acadian entering this market, some key onshore observations that impacted China A-shares over the past 12 months, and how these developments may affect strategic asset allocations moving forward.
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Q: Why did Acadian launch a dedicated China A strategy? “The opening of the China onshore market is an event that is hard to overstate for investors. This is the world’s second-largest equity market, and up until last year, it was virtually impossible to access for foreign investors. Acadian has a 25-year history of investing in Emerging Markets, and we have been investing in China for two decades. To offer investors access the best access to onshore China, we decided to take the more arduous route of an RQFII license. This provides our clients the broadest opportunity set, which we believe is a vital component to unlock the opportunities offered by the Chinese economy.” Laurent De Greef, SVP & Head of Client Solutions and Product Strategy |
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Q: 2018 was a historic year for the A-shares market and for China more broadly, marking the initial inclusion of A-shares into commonly used global benchmarks. What was the initial impact of MSCI including A-Shares in several of its benchmarks last year? “This monumental event was effectively overshadowed by international trade frictions and bursts of geopolitical tensions that verged on brinkmanship. While there was an increase in non-Chinese ownership of onshore stocks, indicating that global equity investors weren’t entirely discouraged, they were undoubtedly unsettled—driving multiples to historic lows. This is an example of the unique risk profile of this market.” Asha Mehta, SVP & Portfolio Manager |
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Q: MSCI announced in February 2019 that it will increase the inclusion factor of A-shares in its indices from 5 to 20 percent throughout the year. Additionally, FTSE Russell will include A-shares in its emerging markets benchmark for the first time, joining MSCI. What do these index inclusions signify about the market as it relates to longer-term strategic asset allocation? "The second-largest economy in the world has thus far remained largely inaccessible to global investors. As investors become increasingly aware of this potential opportunity and as benchmarks begin to reflect the full breadth and depth of the Chinese economy, we believe allocators need to reassess how China may help them achieve their investment goals. In the near-term, active investors may benefit from the abnormal levels of market inefficiency. Over the longer term, investors will need to assess how China fits within their overall investment program. Stand-alone China public equity allocations may become the standard.” Joe Ritter, VP & Product Strategist, Equities |
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Q: How should institutional investors approach this market given that it has traditionally been driven almost entirely by retail investors? “Retail investors represent approximately 80% of trading volume and are a key element behind the elevated levels of market inefficiency. Investors with an active, systematic process may find ample opportunities to generate alpha. I believe that investors with a long investment horizon should embrace heightened volatility with a systematic investment process in an effort to capture the unique source alpha that is largely uncorrelated to other global equity markets—including the offshore Chinese equity market.” Kurt Livermore, SVP & Portfolio Manager |
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Q: What role does data play in this market? “As the onshore Chinese equity market has developed over the past two decades, so too has data availability and quality. Acadian has been following China A share-related data for over a decade. We have a dedicated data team monitoring and ensuring the integrity of our datasets, and we continue to be encouraged by the richness of the data. Acadian’s fundamentally based stock forecast model estimates returns for the entire investable A-shares universe and is the lifeblood of our process. Without an extensive amount of quality data available, we would not have been able to develop our dedicated China A-shares strategy.” Bin Shi, SVP & Portfolio Manager
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