The Alpha and Beta of Chinese Equities

Mainland Chinese equities, as opposed to the ‘offshore’ listings easily accessed by international investors in Hong Kong, offer additional exciting opportunities to disciplined bottom-up stockpickers. The lower correlation of the A-share market to the global equity market should also allow for a more ‘efficient’ portfolio – i.e. one with a better risk-return profile. We believe that taking an ‘all-China’ approach gives investors the widest possible access to companies that stand to benefit from China’s robust economic growth.

For professional investors and financial advisors only. Not for distribution to the public or within a country where distribution would be contrary to applicable law or regulations. This document should not be considered as independent investment research, it is our own analysis conducted in order to support the case for our All China Equity Strategy.

Paper One

Why China now? Why make a dedicated allocation to China

• We believe MSCI’s decision to include China A-shares in its Emerging Markets & ACWI indices is a significant event for long-term investors 
• As well as offering superior long-term earnings growth potential, Chinese equities trade at a discounted valuation to developed markets
• We recommend  investors take an all-China approach to benefit from the full opportunity set
• We believe there is a window for savvy, patient investors to access the opportunity by building a position now

Read Paper One

Paper Two

Why China now? The beta argument

• Economic growth is shifting from investment-heavy industries to more sustainable and shareholder friendly, consumer-oriented areas
• Old economy growth rates have started to recover & innovative products and services give new economy companies a cutting edge
• The Chinese government has taken proactive steps to address overcapacity and lower the cost of servicing debt
• We believe that Chinese equities offer a compelling investment opportunity for disciplined stock pickers

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Paper Three

Generating ‘alpha’ in China: A 4Factor perspective

• The Chinese A-share market is inefficient due to the domination of retail investors, poor quality data and inefficient capital allocation
• The 4FactorTM process has worked well in China as evidenced by the strong alpha generation exhibited by the All China Equity Strategy over the last three years
• Both the screen and the specialist China team have generated alpha

Read Paper Three

Summary Paper

The alpha and beta of Chinese equities

• Mainland Chinese A-shares offer exciting opportunities to disciplined bottom-up stock pickers
• The lower correlation of the A-share market to the global equity market should allow for a more efficient portfolio
• We believe taking an all-China approach gives investors the widest possible access to companies that stand to benefit from China’s robust economic growth

Read summary

Potential risks

Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. bankruptcy), the owners of their equity rank last in terms of any financial payment from that company.

Investing in China: China may have less developed legal, political, economic and/or other systems. Investment in mainland China may therefore involve a higher risk of financial loss when compared with countries generally regarded as being more developed.