We have over three decades of experience applying our systematic investment process in nascent markets. As early entrants in Emerging and Frontier markets, we have been investing in Chinese stocks for over two decades and are now applying our considerable experience to a dedicated China A-shares strategy.
An elevated level of market inefficiency combined with comprehensive data and intensifying market-reform efforts create a compelling investment opportunity. We encourage you to engage us on all matters related to the onshore Chinese equity market and how this burgeoning class of equities, linked to the second largest economy in the world, might fit within your investment program.
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.
We have calibrated our risk and return forecasting frameworks to suit the unique dynamics of this market. We see this as the next frontier in our history of applying systematic investment strategies in emergent capital markets.
Brief observations on the China A-shares market.
Recent inflows from offshore investors into onshore Chinese equities have been particularly focused on growth-oriented stocks. We note that this focus, ignores the long-term success of value investing in China and exposes these investors to a potential style rotation.
Read MoreThe current drawdown has unfolded without abnormal suspension activity, in our view underscoring China’s commitment to and progress towards market liberalization.
Read MoreA number of frictions within the market reduce shortable A-Shares inventory and increase borrow costs, especially in smaller companies.
Read MoreThe recent elimination of investment quotas attached to the QFII and RQFII licensing programs marks further progression of onshore market liberalization.
Read MoreAlthough we still see suspensions as a material risk, the recent trend in suspensions represents a positive step toward the alignment of A-shares with international institutional standards.
Read MoreWe observe the mispricing of risk in China A-shares, similar to other world markets. In China A, large-cap stocks constitute a greater portion of the low-vol universe than they do in the rest of emerging markets, and state ownership plays less of a role than investors might guess. Hypothetical China A minimum variance portfolios exhibit reduced risk and smaller drawdowns, suggesting promise for low-volatility investing in A-shares
Following MSCI’s recent inclusion of China A-shares in its Emerging Markets index, many investors are evaluating their exposure to Chinese equities. A popular perception that Chinese companies lag with respect to ESG considerations has drawn attention to such issues even from investors that have not pursued ESG-based approaches in other contexts.
The inclusion of China A-shares in widely used benchmarks is a milestone event that acknowledges the wide-ranging market reforms implemented by the Chinese government. This paper provides a summary of the inclusion event as well as outlining the future implications for global investors.