Foreign demand for A shares expected to escalate in 2017

UBS Group AG said on Monday that the trading volume of China’s A shares by its overseas clients will likely double in 2017, as China continues to liberalize its capital markets, according to a senior executive of the Swiss bank.

The projection of greater foreign participation in the A share market was based on the low trading volume in 2016, due to the sharp volatilities.

The expectation of a further opening up of the market, including the possible inclusion of A shares into the MSCI global benchmark index this year, is also expected to stimulate foreign demand.

“The expectation of the MSCI inclusion and the strong fiscal expansion in the US under the Trump administration will likely push more overseas capital to flow into the A-share market,” said Thomas Fang, head of China equities at UBS AG.

Meanwhile, the increasing demand by Chinese clients for overseas asset allocation will also create new business opportunities for UBS’s onshore business in China, Fang said.

“While some bottlenecks still remain, we believe the overall policy stance is to support a two-way opening of the Chinese capital market and it will continue this year,” he added.

Gao Ting, chief China strategist at UBS Securities, said that the A-share market was likely to deliver a better performance in 2017 compared with that of the past year.

“The market will be supported by the expectation of improved profitability of listed companies,” Gao said, noting that the CSI 300 index, which tracks some of the largest stocks in Shanghai and Shenzhen, will likely reach the level of 3,750 by the year end.

The profitability of nonfinancial listed companies in the A-share market will increase by 4 percent while financial listed companies will see their profit rise by 6.8 percent in 2017, according to Gao.

But Gao warned that the political uncertainties will be a major risk for investors in 2017.

External factors including Brexit, the Trump presidency, as well as uncertainties in the European elections will continue to affect investors’ sentiments this year.

In China, the major risk for the stock market will be the potential shift of the current accommodative monetary stance by the Chinese central bank, Gao said.

“Any tightening of the monetary policies or greater than expected regulatory control to maintain financial stability could have a negative impact on market liquidity and investors’ risk preference,” he said.

The market will be supported by the expectation of improved profitability of listed companies.” Gao Ting, Gao Ting, chief China strategist at UBS Securities