Stock Connect attracts comments from the industry
Anh Lu, portfolio manager of the T. Rowe Price Asian Ex-Japan Equity Fund
“We are optimistic about Stock Connect, allowing foreign investors access to mainland A-shares. This is another important experiment in the opening of China’s capital markets and the internationalisation of the renminbi. Our hope is that the limited quotas that the Connect begins with will be expanded over time, and its scope will eventually cover Shenzhen as well as Shanghai. If successful, it over the next few years the QFII scheme for foreign access to A-Shares may become increasingly redundant.
“The Stock Connect could also hasten the inclusion of A-shares into the broader MSCI indices – MSCI China is already the largest country component of MSCI AC Asia ex Japan and MSCI EM, and that weight may increase over time with increased A-share inclusion. The A-share market is home to a many companies in the consumer, healthcare and industrials sectors, for example, that are not available to investors in Hong Kong listed China companies.”
Jorry Noddekaer, manager of the Nordea 1 – Emerging Stars Equity Fund
“The gradual opening up of China’s A-share market via the connect scheme is a milestone for China’s capital markets and it is very encouraging that a new start date has been set. It is a sign of the leadership’s commitment to reform which is one of the reasons why we have a positive long-term view on China. This scheme broadens our investment universe to include a large number of shares listed on the Shanghai Stock Exchange which would otherwise not be accessible, including shares in the structurally growing auto, healthcare and media sectors.
“In addition, as this is a two-way scheme, mainland Chinese investors are likely to buy into Hong Kong-listed names in a number of sectors which remain underrepresented on the Shanghai exchange for example the internet sector – here we could benefit from our holding in Tencent. Lastly, valuation gaps between A- and H-shares can be exploited to generate alpha.”
Darius McDermott, managing director of Chelsea Financial Services
“One of the major concerns is that both exchanges operate in different regulatory environments. Relative to the rules in Hong Kong, investors will have to endure more restrictive trading regulations in Shanghai. Investment in A-shares will be subject to withholding and capital gains tax, and there is no intraday trading. Retail investors should be very aware of all of the potential risks around regulatory issues and tax implications before investing in any markets.
“This could be important for Chinese stock markets in the longer term. The principle of allowing free access to the country’s stocks is crucial to sustained growth of China’s equity markets and economy. This is a clear signal from China’s leadership the stock market is at the centre of its future expansion plans and policies.”
Jonathan Pines, manager of the Hermes Asia ex Japan Equity fund
“Data from 2013 showed only 1.3% of the A-shares market was owned by non-Chinese investors. In anticipation of this opening up, over the last few months I have significantly increased the fund’s exposure to both A-shares, which now comprise approximately 8% of our Asia ex-Japan fund.
“The A-share market is the world’s second-most liquid market after the US, and ahead of Japan. However, the fact that trade is currently dominated by relatively unsophisticated domestic retail investors has resulted in significant inefficiencies. That does not mean most A-shares are cheap, even though the benchmark has declined for years.
“Indeed, the apparently undemanding headline P/E multiple of 9x for the local benchmark is distorted because a high proportion of the benchmark consists of banking stocks, which are cheap for a reason. This is namely investor worries over banks’ levels of leverage – particularly off-balance sheet debt. In fact, most A-shares are expensive relative to their quality, with well-governed companies generating free cash flow still a rarity.”
“So why then have I been loading up on A-shares? This market presents two main sources of opportunity. Firstly, some issues are listed on both the A-share market and the H-share market, and sometimes companies trade at a discount on the A-share market. For example, the fund holds Ping An Insurance A-shares, which trade at a 12% discount to its H-share counterpart. The limited opening up of the A-share market might result in the gap closing, and if we are lucky, the gap will close by the A-share rising rather than the H-share falling.”