China A shares: A massive market ripe for stock selection | Capital Group

Investment Insights

May 2019

China A shares: A massive market ripe for stock selection

One of the world’s biggest stock markets is opening up to foreign investors. Hundreds of mainland Chinese companies, known as A shares, are being added to the benchmark MSCI Emerging Markets Index, a step toward further integrating China’s US$8 trillion stock market into global financial markets.

Trade war or not, getting China right matters. China is poised to dominate the benchmark emerging markets index, creating opportunities and challenges for investors. 

For those hoping to identify the next Alibaba or Tencent, the A-share market could be a prime hunting ground. More than 3,000 companies are listed on the country’s Shanghai and Shenzhen stock exchanges. But most A-share companies are not well-known outside of China. “I believe that creates an advantage for investors like us who’ve been on the ground talking with management to understand their businesses,” says portfolio manager Nick Grace.

chart-web-article-721W-x-variable-H

Sources: MSCI, RIMES. As of 6/30/18. Chart shows MSCI China A Onshore Index sector weights as of 12/31/00, 12/31/10 and 6/30/18.

The A-share market can be complex and difficult to navigate, given its sheer size, regulatory environment and multiple corporate structures. Business choices and capital allocation decisions often depend on whether a company is state-run or private. Company leaders can be government officials or entrepreneurs whose personal ambitions may not always relate to running a company. Governance standards at Chinese companies often lag those of publicly traded firms and stock exchanges in developed markets. Trading in the A-share market is dominated by local retail investors who may be more momentum-driven and short term in focus.

All of this can make China a stock picker’s paradise. But buyer beware: “It’s a vast universe with a wide disparity in terms of the quality of companies in which to invest,” says portfolio manager Winnie Kwan.

Get China A-shares report here.

 

 

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