China Equity Markets: Pockets of Opportunities, Fundamental Research Is Key
Following a substantial run-up in 2017, China's stock markets experienced notable volatility in recent quarters. The MSCI China Index was down roughly -9% year to date measured in U.S. dollars as of September 30, 2018, while China's mainland, domestic A-shares were down nearly -20% measured in U.S. dollars for the same period. Valuations among A-shares in particular are reaching the point at which we believe some of the higher-quality stocks within that universe are starting to look more attractive. While sentiment has been weak amid trade concerns and worries about a possible economic slowdown in China, fundamentals remain sound. Larger industrial firms reported 16% earnings growth through August, demonstrating solid footing across even some of the less dynamic segments of the economy. For active managers employing an all-shares approach to investing in China, our current environment provides an array of attractive choices, but caution and due diligence are required.
Where Chinese Equities Trade
A-shares and H-shares represent the largest portion of Chinese equity markets. Here's a brief primer of their definitions.
- A-shares represent China's onshore, domestic markets, where securities trade on either the Shanghai or Shenzhen stock exchanges. At present, individual foreign investors can typically only gain exposure to the A-share market through a mutual fund or exchange traded fund (ETF).
- H-shares represent China's offshore, international markets, where securities trade on the Hong Kong Stock Exchange. Individual foreign investors can typically buy individual securities in the H-shares market, as well as invest in the market through a mutual fund or ETF.
At Matthews Asia, many of our portfolios employ an “all-shares” approach to investing in China, which means that we can potentially invest in any markets where Chinese stocks are traded, including the A-share market.
A-Shares: Valuations Look Attractive
Following a steep decline in equity prices onshore, A-share valuations are currently at historic lows relative to H-shares. (See figure 1.) The A-share market, however, may have overcorrected. Current levels of negative investor sentiment don't match what we're seeing in terms of economic activity in China. What's more, the Chinese government added a small measure of fiscal stimulus to the economy on Oct. 1 in the form of tax cuts for China's low wage earners. Sentiment could turn positive should consumer spending remain robust and corporate earnings maintain their current positive trajectory.