Asset managers need new strategies to take advantage of China’s equity markets

China flags

A growing number of asset managers are taking an increasingly sophisticated approach to China’s growing equity markets, as both onshore and offshore Chinese stocks outperform emerging markets, according to a recent report from bfinance.

China was the first country to be hit by Covid-19, but its equity markets bounced back notably faster from the turmoil than elsewhere. In the first quarter of 2020, the MSCI EM index lost 23.6 per cent, compared to the onshore MSCI China A index which fell only 9.72 per cent, and the largely offshore-listed MSCI China index losing 10.22 per cent. 

Weichen Ding, senior associate at bfinance, says he expects international investor and fund manager interest to pick up. “It is increasingly untenable to remain on the sidelines of the world’s second largest equity market. More investors are beginning to take a strategic approach, as one might traditionally do with markets such as Japan, Europe and the US.”

Bfinance says that of all active China equity strategies, the relatively new class of All-Shares strategies have “the greatest potential for alpha generation”, since they are able to select stocks from 3,500 onshore A-Shares with a total market cap of USD7.9 trillion, as well as 1,300 offshore listings for a combined USD10 trillion market cap. All-Shares managers also have the advantage of being able to make decisions based on relative value between different Chinese equity markets.

There are currently fewer than 20 managers offering All-Share strategies suitable for institutional clients, most of which have short track records compared to the well-established asset class of China A-Shares, which has over 60 managers offering active strategies.

“Investors examining this space at the moment will encounter a landscape of products and strategies that has changed a great deal during the last five years. Right now, the most noticeable changes are taking place in the All-Shares space: there are still fewer than 20 strategies, but more than 30 managers are able and willing to offer this strategy to prospective clients – for example, by combining existing onshore and China offshore capability together,” says Ding.

Clients who are willing to seed these new strategies may also be able to obtain management fees of 30-55bps or less, which is far below the 70-80bps typically charged by China A-Shares strategies and the more established All-Shares strategies.

Nevertheless, four in five investors are only exposed to Chinese equities through Global Emerging Market equity strategies, according to Greenwich Associates and Matthews Asia’s survey in 2020. 

And among those that do take an active approach to Chinese equities, many remain wary of All-Share strategies, since they believe tensions between US and China pose a risk to offshore New York-listed Chinese stocks. In a report in May, Morgan Stanley strategists recommended investors buy Chinese equities, but said they prefer mainland Chinese A-Shares to their US-listed counterparts.