Previously, I explained that China A-Shares provide access to dynamic growth opportunities. Here, I’d like to explain why the China A-Share market structure and characteristics present unique opportunities for active managers.

Specifically, the ownership structure of China A-Shares, characterized by limited foreign investment and a high share of retail investors, supports growth as the share of foreign investment is poised to increase and domestic flows are supportive.

And because the China A-Share market is uncorrelated, under-researched, and inefficient, investment opportunities should abound for active managers committed to fundamental research.

Room for Growth

Historically, China A-Shares were accessible only to domestic investors or foreign institutional investors through the Qualified Foreign Institutional Investor (QFII) system. But with the launch of the Shanghai-Hong Kong Stock Connect in November 2014 and the Shenzhen-Hong Kong Stock Connect in December 2016, that changed.

There is plenty of room for growth in foreign ownership of China A-Shares.

Despite a decade of the China A-Share market slowly opening, however, foreign investors still account for less than 5% of the market. Thus, there is plenty of room for growth in foreign ownership of China A-Shares.

There is also room for growth is domestic ownership of China A-Shares. Currently, 85% of Chinese household wealth is held in cash or real estate.

As the chart below illustrates, this is well above international norms, and we expect it to decline as the financial markets in China mature and Chinese savers gain more investment options.

Uncorrelated, Under-Researched, Inefficient Market

Broadly speaking, emerging markets have become increasingly correlated to other global asset classes. But, as the chart below shows, China A-Shares tend to have limited correlation to other emerging and developed markets.

The China A-Share market is also under-researched. There are more than 1,500 listed Chinese companies with coverage from fewer than five sell-side analysts.

This number is further reduced when considering just the global brokerages with English language research. They tend to cover just 300 to 400 China A-Shares at any given time.

Lastly, the China A-Share market is an inefficient market, meaning it is a stock-picker’s market. As the chart below illustrates, the dispersion of returns among Chinese stocks (as represented by the CSI 300) is substantially higher than any other broad equity benchmark.

Together, these factors—growing foreign investment and domestic flows combined with an uncorrelated, under-researched, and inefficient market—should create investment opportunities for active managers committed to fundamental research.

In another post, I will provide more detail about why these opportunities are being driven by the well-documented growth in China’s middle class combined with its innovation boom.

 

Past performance does not guarantee future results. Any investment or strategy mentioned herein may not be suitable for every investor.Investing involves risks, including the possible loss or principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The securities of Chinese companies may be subject to greater volatility and less liquidity than companies in more developed markets.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

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This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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