The inclusion of China A shares in the MSCI Global indices has been heralded as an opportunity, but comes with warnings the move will create greater volatility in global markets.
'A shares' are shares in businesses in China listed on the domestic stock exchange, rather than on the Hong Kong stock market.
In a landmark move, from today (1 June), some 234 of the 3,500 A share companies listed in China are being included in the emerging market MSCI Index, widely followed by active managers and held by passive investors around the world.
The opening up of the Chinese domestic corporate market gives investors outside the country new levels of access to the world's second biggest economy.
Jason Hollands, managing director for communications and business development at Tilney, said most of the companies are small and mid cap, and more focused on the domestic Chinese economy.
He said while there are some attractive companies on the list, they are mixed among what he called "duds". He warned investors seeking exposure there to ensure the emerging markets fund they buy has managers willing to look at the market in-depth.
According to John Lim, China equities portfolio manager at Alliance Bernstein, Chinese retail investors have been moving out A shares and buying companies listed in Hong Kong, because the A shares are more expensive.
Mr Lim said the inclusion of A shares in the MSCI index will boost the share prices of those companies because passive investment funds will be required to buy them.
This would enhance the gap in valuations between the two markets, prompting more investors based in China to buy Hong Kong shares, he said.
Capital controls mean investors in China are unable to buy overseas equities, except those of Hong Kong.
Mr Lim said the vast majority of equity investing in China is carried out by private individuals, rather than advised clients or institutions. Those investors tend to be very short term in outlook and this creates extra volatility, he said.
This volatility will happen on the Hong Kong market and, in time, on global markets, he forecast, as China’s liberalisation of its stock market eventually lead to investors in mainland China buying global equities, effectively exporting volatility across the world.
The impact can already be seen in the H-shares market of Chinese stocks listed in Hong Kong, he said.
"In recent months, flows of Chinese investments to Hong Kong have picked up dramatically for two main reasons; that H-shares have been cheaper than A-shares since 2014 and secondly, shares of big companies such as Tencent and various Macau casino groups simply aren’t available in the A-share market, so Chinese investors who want to own them have come to Hong Kong for those exposures.
"Over time, this trend could affect the behaviour of the H-shares market. Domestic Chinese equity markets are very volatile and inefficient because they’re dominated by retail investors who own 86 per cent of the market on a free-float adjusted basis.
"That’s more than double the proportion of retail investors in most major developed markets and Asian developing markets. In the US, retail investors haven’t dominated equity markets to such an extent since the 1960s.”
Mark Williams, who runs the £114m Liontrust Asia Income fund, said the inclusion of A shares in the global index “is not immediately significant” because only 2.5 per cent of the market cap of the Chinese market is being included.
He added that while he owns shares listed on the Hong Kong market, but has little love for the A shares market, saying “there are better opportunities elsewhere”.
David Jane, who runs £900m across a range of four multi-asset funds at Miton said the exposure he wishes to have to China is obtainable from the Hong Kong market, so at present he won’t be buying A shares.
David Scott, an adviser at the firm of Andrews Gwynne in Leeds, said the inclusion of the A shares is a signal that "the global economy is shifting eastwards", and he said the valuations at which developed market equities trade does not reflect this.
David.Thorpe@ft.com
