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China, Today

Interview: Stock Connect turns three

17 November 2017

By Wenchang Ma, Assistant Portfolio Manager

It’s the three year anniversary of Stock Connect today, 17 November. Stock Connect, a collaboration between the Hong Kong, Shanghai and Shenzhen Stock Exchanges, allows international and Mainland Chinese investors to trade securities in each other's markets through the trading and clearing facilities of their home exchange. First launched in November 2014, the scheme now covers a total of over 2,400 eligible equities, including 900 in Shanghai, 1,000 in Shenzhen and 500 in Hong Kong.

Wenchang Ma, Assistant Portfolio Manager, Investec All China Equity Strategy, answers questions about the relevance of Stock Connect for international investors into China and the broader investment case for China.

Wenchang Ma, Assistant Portfolio Manager, Investec All China Equity Strategy

When did Investec first start investing in China’s stock market?

Harnessing our experience gained first from QFII and RQFII, we started investing in China through the Stock Connect programme in January 2015, with Investec Asset Management being the first global investment manager to do so with a UCITS Fund. We have access to Stock Connect across a wide range of our investment strategies, and our 4FactorTM team in particular have been pioneers investing in the region.

What are the key factors that drove you to invest in Chinese stocks? Do you think your investments have so far generated the returns you were looking for?

Chinese companies offer high earnings and cash flow growth opportunities, and the Chinese equity market is the second largest in the world. However, valuation is still at a discount compared to the global equity market, and China is still under-represented in global investor’s portfolios. The domestic market is dominated by retail investors who are quite often short-term trading oriented. There is a variety of investment opportunities for disciplined institutional investors to generate returns from. We continue to find new exciting ideas to invest in and aim to continue to seek alpha for our investors.

Do you think the Shanghai Hong Kong Stock Connect has played a significant role in helping overseas capital benefit from the China growth story? What are your expectations for its role in the future (for example, as China’s capital market liberalization continues, do you expect the Stock Connect to continue to play its current role, or do you think investors would want to invest in China’s A-share market directly)?

The Stock Connect programme marks an important step towards capital market opening. It offers foreign investors easier access to the attractive growth opportunities on China’s domestic equity market. Despite being the second largest equity market globally, China’s equity market remains under-explored by global investors. This is set to change gradually in the future as we see more investors now making use of the Stock Connect programme to add quality and growth to their existing portfolios and to take advantage of the diversification benefits. As China continues to improve the access facilities and market regulation, investors will find their existing concerns addressed gradually, as we have seen with the development of the Stock Connect programme.

How positive are you about investing into China’s A-share market (either directly or through Stock Connect)?

We have been investing into China’s A-share market since before the Connect programme was launched. We believe in the opportunities China has to offer and have been advocating that consistently. China’s economic growth is shifting from heavy investment-driven to more sustainable and consumer-driven. An increasing number of companies are demonstrating sustainable competitive advantage based on innovation, and are adopting share-holder friendly corporate governance. All of these are enhancing our confidence in this market.

Do you think the 2015 China A-share market crisis has left its legacy on overseas investment funds’ interest in buying Chinese stocks, or do you feel investor sentiment has moved on from that?

The 2015 A-share market crisis most certainly reminded investors of the challenges investing in an emerging market, even one as rapidly moving forward as China. The last year in particular we have begun to see greater investor confidence investing into the market. A catalyst to this was the announcement that MSCI will be including China A shares within their Emerging Markets index from June 2018, now that a number of the early challenges associated with investing in China have been incrementally addressed.

Wenchang Ma discusses more in this podcast, available here

Specific risks

Geographic/Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.
Developing market: Some countries may have less developed legal, political, economic and/or other systems. These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed.
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: Investment in mainland China may involve a higher risk of financial loss when compared with countries generally regarded as being more developed.
Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income.

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