Three things your clients need to know about China

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."

Historically a lot of Chinese companies have found it difficult to deal with corporate governance but we believe this trend is changing. Ken Wong

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.

Mr Wong added that as many of these companies also pay good dividends, this means that, in a more volatile year, as 2018 is shaping up to be, it might be best to invest in some of these "sluggards" for the inherent value.

3) Corporate governance has been an issue for some investors when it comes to putting money into Chinese companies. How are companies allaying these concerns?

Mr Wong said: "This is definitely a hot topic. More and more institutional investors are focused on environmental, social and governance (ESG). 

"Historically a lot of Chinese companies have found it difficult to deal with corporate governance but we believe this trend is changing."

This is especially so for the H-share companies - stocks listed in Hong Kong - but he said it would "take a bit more time" for the mainland-listed A-shares companies to catch up with implementing ESG policies.

However, according to Mr Wong, the A-share companies "are moving in the right direction", and there will definitely be a trend towards better corporate governance and social responsibility among the A-share companies over the next five to ten years.

simoney.kyriakou@ft.com