Chinese companies have come a long way over the past two decades, with stronger corporate governance, less government interference and better shareholder remuneration. But how far can the Chinese growth story run?
Ken Wong, client portfolio manager at Eastspring Investments, caught up with FTAdviser and answered the following three questions for us.
1) What does the inclusion of 222 Chinese A-share companies into the MSCI indices mean for investors?
Later this year, MSCI will include 222 Chinese A-shares (mainland) listed companies into its indices, potentially bringing more investment opportunities to investors.
For some managers, this is good news. For example, Howard Wang, portfolio manager of JPMorgan Chinese Investment Trust, said: "While the near-term impact on the A-share market could be limited, we see long-term positive implications for the development of the onshore markets.
"Upon MSCI index inclusion, A-shares will attract more foreign interest and flows, given increased relevance of the asset class, which will diversify investor profiles and investment style."
However, while Eastspring is pleased that these big-name domestic stocks are going to be included in the index weighting, Mr Wong told FTAdviser it would not make a lot of difference initially.
Mr Wong commented: "The overall inclusion factor of these Chinese A-share companies into the index is only going to be about 5 per cent in the beginning. So even though they are some of the most well-known companies listed in China, their initial weightings in the indices are going to be very low".
Moreover, he said investors should still consider each company's individual investment case.
Eastspring is a bottom-up value style manager, so for him the weighting of any company in the benchmark is not the most important factor, but the underlying fundamentals of the stock.
"Whether or not they are incorporated does not have a big significance for us. What is important is whether these will be good companies for us over the medium to long-term", he added.
2) What sectors are looking hot in China?
Over the past few years, technology, construction and infrastructure have been big-ticket areas for investors to focus on in China. It has been clear through government-led initiatives, such as the One Belt One Road
But what does Mr Wong think about the opportunities for Chinese stocks in the future? Which sectors are going to be hot to trot later on in 2018?
"It's very hard to predict what markets are looking hot in China right now, particularly given the [recent] sell-off", he told FTAdviser. "But that said, we believe some of the underperforming sectors in 2017, such as financials - banks and insurance companies - and utilities, as well as energy companies, are worth monitoring."
He said many of these have underperformed by 5 per cent to 10 per cent in 2017, but if you look at their fundamentals, specifically free cash flow and earnings growth potential, there are some very good prospects.