Should investors still consider the Chinese equity market?
Investors are pulling back from funds investing in China with outflows from ETFs and mutual funds hitting almost US$6 billion for the year, but opportunities still exist
26 Aug 2019 | Janette Chen

Investors are relocating their assets from equities to fixed income as funds investing in China are seeing large outflows. However, the China A-share market, the best performing market in the Asia-Pacific by far this year, is still providing investors with opportunities. 

It has been a challenging time for asset managers and investors who have been faced with market turbulence and uncertainty such as the escalating China-US trade war. “We are seeing more investment flows from our investors rushing into fixed income – and in fact, our fixed income business has had 30% growth in the first half of 2019,” says Frederick Chu, head of ETFs at China Asset Management (Hong Kong).

The uncertainty means investors have been retreating from equity markets. “We have seen quite a bit of outflow from the equity market globally – including both the US and China, as well as ASEAN countries. This was mainly triggered by the reversal of trade talks between the US and China, and also increasing concern of a possible US recession,” says Chu. 

A-share ETFs have suffered a net outflow in Q2 2019 dragged by the escalated China-US trade conflict. The outflows from ETFs and mutual funds investing in A-shares have hit US$5.9 billion year-to-date, according to EPFR Global data, recording the highest outflow since 2017.

Taking Hong Kong-listed ETFs as an example, the year-to-date net outflow of the two FTSE A50 ETFs, HS FCI50 ETF and TRFXIC50, reached US$2.2 billion as of August 19, according to Chu.

However, this does not necessarily mean that it is not a good time to invest in the equity market. “The A-shares market has been experiencing high volatility in 2019, yet by far it is still the best performing market in the Asia-Pacific, with the CSI300 Index having shot up by almost 26% and A50 Index up by 29%,” says Chu.

“Speaking to large global and regional ETF investors – some of them are gradually switching position from A50 to CSI300, to better capture broader exposure,” says Chu. “With regards to A-shares itself, the CSI 300 Index is increasingly being recognized as one of the most effective benchmarks for asset allocation,” he adds.

The CSI 300 Index consists of the 300 largest and most liquid A-share stocks, aiming to reflect the overall performance of the China A-share market. As of August this year, the majority (38.35%) of the index consists of companies from the financial sector, followed by the consumer staples (13%) and the industrial (11.61%) sectors.

Six active Hong Kong-listed ETFs are tracking this index, with asset managers such as BlackRock, China Asset Management (Hong Kong), CSOP Asset Management, DWS, and Haitong International Asset Management among the list.

“Apart from Hong Kong, the same is also reflected in the US where the fund flow of Xtrackers Harvest CSI 300 China A-Shares ETF is still flat despite the adverse market condition,” Chu notes.

Due to investors switching from A50 ETFs to CSI 300 ETFs, the assets under management (AUM) of ChinaAMC CSI300 ETF has surpassed that of CSOP FTSE A50 ETF for the first time since their inception in 2012, becoming the largest ETF among all Chinese issuers.

The year-to-date net outflow of ChinaAMC CSI300 ETF was US$252 million, smaller than the outflow of CSOP FTSE A50 ETF. The AUM of ChinaAMC CSI300 ETF reached 12.86 billion yuan (US$1.82 billion) on August 19, slightly more than the CSOP FTSE A50 ETF’s 12.85 billion yuan.

On top of investors’ growing interest in the CSI 300 Index, the Greater Bay Area (GBA) is another area to look into with Chinese regulators continuing to push the connectivity between the mainland Chinese and Hong Kong markets.  

The first cross-border ETF that can be traded on the Shanghai Stock Exchange, Shenzhen Stock Exchange and Hong Kong Stock Exchange was launched by ICBC Credit Suisse Asset Management on August 19. This ETF tracks the Greater Bay Area Innovation 100 Index (GBA Innovation 100).  

The GBA Innovation 100 was launched in April this year by Shenzhen Securities Information Co and the China Center for Information Industry Development. It is based on 100 stocks covering advanced manufacturing, strategic emerging industries, modern services and the maritime economy, tracking the performance of companies based in the GBA.

“MSCI will begin the second batch of inclusion at the end of August. Institutional investors and asset allocators shall gradually follow the inclusion factor and time the market at this point to capture better pricing. With the CSI 300 Index average PE still at a lower range of 14x, A-shares big caps are still considered quite valuable,” Chu suggests.  

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