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Opening For Business: China A-Shares And A Diversified Portfolio

Over the last year, China’s equity markets gained greater global presence when China-A shares were listed on the MSCI and FTSE indices. Yet, the government has been slow to open more investment opportunities to foreigners.  In this episode, we explore this rapidly evolving economy and how U.S. investors should view China in the context of their emerging markets exposure.

Our guest is June Lui, a Portfolio Manager for the Greater China Strategy at LGM, which is one of BMO’s specialized investment teams.  We couldn’t think of a better person to ask about current events in China and uncover some actionable ideas for how advisors can incorporate China into a well-diversified portfolio.

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In this episode:

  • Current events and short-term outlook for China’s equity market
  • Background on China’s economy
  • Identifying smart investment opportunities in China

Transcript

June Lui – Well Hong Kong is a very exciting place. It’s so sophisticated. It’s very efficient so you can get where ever you want to in a very easy way, so it’s a very lively city.  

Ben Jones – So kind of like the 101 here in LA. No traffic and —

June Lui – Ha ha ha ha! Hong Kong is much better!

Ben Jones – Yeah exactly. So today we’re here to talk about China and emerging markets and in particular as a professional investor who spends your career investing in the Chinese markets we want to get your perspective on the opportunities and challenges that advisors might face when trying to incorporate China into a well-diversified portfolio or China exposures. And then also love to talk to about some current events that are happening now and have captured the news over the course of the summer as well. But let’s start first with what kind of kicked off a lot of discussions that your team and our teams have had about China which is China A-shares are now included in the MSCI and FTSE Russell indices. And can you talk a little bit about how this changes the importance and weighting of China in those indices.

June Lui – Yep. With the inclusion of China A-shares into the MSCI, FTSE Russell and also S&P, that means that for any investors including those passive investors that are going to have a bit more exposure in China, especially in China A. For investor you have to pay attention to the markets that you have more exposure and for active managers and we also — we are very glad that market is getting more open to investors. And we see the flows and also more participation by institutional investors and foreign investors that is going to be helpful in putting some more rationality and order into this very wild market.  

Ben Jones – So correct me if I’m wrong because I’m often wrong but there are A-shares and H- shares. Is there another kind?

June Lui – Well, there are actually many types of shares. China A-shares are those listed in the domestic exchanges which are the Shanghai Exchange and Shenzhen Exchange. And there are many Chinese companies listed overseas including Hong Kong. Those listed in Hong Kong, we call them H-shares and we also have some companies called P-shares. They’re also Chinese companies listed in Hong Kong.  Then also we have the ADRs listed in the US and Singapore.

Ben Jones – Wonderful. Thanks for that explanation and help me out – just at a real basic level what was the weighting to China before the A-shares were added and what is it now in those indices?

June Lui – Well before that in the MSCI emerging market index China accounts for just less than 30%, and so with a full inclusion which is going to happen in the next few years China in total would account for about 40% of the emerging markets index.  

Ben Jones – So big increase in weightings for an indices.  

June Lui – Yeah.

Ben Jones – Can you talk a little bit about what the implications of that change in weighting and the benchmark means for active managers like yourself?  

June Lui – Doesn’t actually change much for us because we are a manager we always look for alpha and look for ideas, whether it is in the benchmark or not in the benchmark we use the very much bottom up approach to find the best investment ideas. And I think the key difference would be more people would pay more attention to the China markets. And so for us we would continue to see this is a great market for any active managers because of the inefficiency in the market and the volatility and also the fact that the market is still very much dominated by retail investors in China. So there are a lot of opportunities of creating value when the speculative behavior leads to mispricing in the market.

Ben Jones – Now you mentioned this before, that the inclusion now gives a lot more access to Chinese equities in the marketplace. Can you talk a little bit how this access has changed and what that’s done to the liquidity of these stocks?  

June Lui – Actually it is more as a result of the increasing assets to the markets, that’s why the MSCI or FTSE and S&P, they decided to include more China A-shares into their benchmarks because with the Stock Connect program that means for foreign investors it’s much easier for them to investment in China A-shares. Before that they have to apply for what we called a QFII quota, and also they are under the capital flow restriction as well so the open up of the equity market in China is a key reason why those major indices include China A-shares.  

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Originally Posted on November 13, 2019 – Opening For Business: China A-Shares And A Diversified Portfolio

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