Market blues ‘fading’ as funds inflow holds
Experts see turnaround with overseas investors betting long on mainland’s A-shares that have hit multi-year lows
Market insiders are unwilling to sell at low prices, while outsiders are downbeat about the outlook and prefer to stay on the sidelines.”
Lu Yuzhong,
With investors forced to the sidelines as China’s stock markets grapple to lift themselves out of the doldrums from a steep dive since the start of the year, a sense of optimism still prevails as pundits and bull-market backers put on a brave face, convinced that the market would soon find its feet, and be out of the woods.
Overseas capital inflow has so far defied the trend in the conviction that a significant market correction had been executed, albeit the ongoing trade stand-off between the world’s two biggest economies is yet to show signs of abating or relenting.
The benchmark Shanghai Composite Index has shed almost 20 percent since January, making it one of the worst-performing major stock exchanges worldwide. Trading volumes have muffled at around 100 billion yuan ($16.03 billion) and hit a 32-month low on Wednesday.
“Market insiders are unwilling to sell at low prices, while outsiders are downbeat about the outlook and prefer to stay on the sidelines,” said Lu Yuzhong, a retail investor in Shanghai, who has seen 20 percent of his investment evaporate so far this year.
The market’s unprecedented descent has had some $2.5 trillion wiped off the value of A-shares in the past nine months, Bloomberg reported.
“The market has already gone through a very significant correction. The (current) valuation and market momentum gives investors some degree of comfort as many of the challenges posed have been reflected in the price free-fall,” reckoned Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management.
According to a poll among investment gurus conducted by J.P. Morgan Asset Management last month, up to 73 percent of them saw positive returns for the Chinese equities market over the next 12 months, beating respondents’ expectations of 67 percent for the global equities market.
More than half of the respondents, however, believed that the upside potential would be below 15 percent, which means it still could not make up for the losses suffered so far this year.
Hui said as trade war uncertainties linger on, and a government deleveraging campaign weighing on domestic growth, he was a bit surprised to find Chinese investment professionals bullish about domestic market equities for next year.
“As the survey was about the long-term outlook, investors believe the market should find the bottom very close to where we’re now,” he added.
Besides Chinese investment professionals, foreign institutional investors also appear optimistic about prospects of A-shares ricocheting.
Overseas capital has continued to pour into the A-share market this year. As of the end of July, the value of A-share stocks held by foreign investors accounted for 3.5 percent of the market’s total value — up from 3 percent early this year — according to French lender BNP Paribas.
“Foreign investors’ interest is rising rapidly as they’re taking a long-term view, coupled with the fact that the valuation of A-shares had reached a multi-year low,” said Lu Jie, head of China research at Rotterdam-based asset manager Robeco.
He’s also holding a long-term positive view of A-shares, and would prefer stocks relating to consumption and industrial upgrade, as well as the technology and innovation sector.
The 12-month PriceEarnings Ratio median of A-shares — a measure for evaluating — fell to 28.37 in August, hitting the minus-30 level for the first time in the past five years. The Shanghai stock market has been trading at 12.63 times expected earnings this year, compared to the S&P 500’s 20.79 times, according to Bloomberg.
Foreign capital inflow is often in inverse proportion to the market’s value as overseas investors prefer low risks when entering emerging markets, said Guosheng Securities analyst Zhang Qianting.
But some offshore A-share exchange-traded funds do not record continuous foreign capital inflows.
Sales of fund manager CSOP’s offshore A-share ETFs (exchange-traded funds) are flat, said Institutional Sales Manager Violet Yu Yixin at Hong Kong-based CSOP Asset Management — the world’s biggest RMB Qualified Foreign Institutional Investor asset manager that helps channel offshore yuan into mainland stocks and bonds.
Nevertheless, Yu admitted that many foreign institutional investors are seeking advice on opportunities brought by Morgan Stanley Capital International’s (MSCI) A-share inclusion.
Index compiler MSCI began including A-shares in its Emerging Markets Index from June, starting with a 2.5-percent inclusion factor. Charles Li Xiaojia, chief executive of Hong Kong Exchanges & Clearing, said in his blog $32 billion had been injected into the A-share market since the first phase of the inclusion on May 31.
The second phase was completed early this month, doubling the inclusion factor to five percent. Another 10 companies were added this time, making the total number of Chinese companies to 236.
Stephane Loiseau, head of cash equities and global execution services for AsiaPacific at Societe Generale, predicted that a further $900-million injection is on the way. He said if the weighting doubles in the coming 18 to 24 months, an extra $3 billion would flow in.
Lu Jie of Robeco also deemed that MSCI is likely to step up the inclusion process given the sound market feedback.
A report by Robeco said the MSCI inclusion could improve the A-share market’s investor structure from retail-dominated to a more balanced mix of institutional and retail investors. Furthermore, the inclusion will also likely to accelerate China’s capital market liberalization and regulation.
Likewise, the inflow of foreign capital is not necessarily linked to the stock market’s ups and downs, but is showing the development trend in investor structure and trading style, said Zhang.