China A-Shares: An Opportunity in Strategic Exposure

The opening of the China A-share market to foreign investors is one of the most significant developments to impact the composition of the global equity markets in decades. Global investors are now able to access one of the most liquid and diverse markets in the world. We believe the implications for the structure of global portfolios are profound and require the attention of emerging markets and global equity investors. China is projected to exceed 40% of the major emerging markets benchmarks in the coming years, making a separate, dedicated allocation to China worthy of consideration for tactical and strategic reasons.

Chinese Equities: Deep Roots, but a Recent Flowering

The roots of equity trading in China date back more than 150 years. The ability to trade in local shares began in 2002, when Qualified Foreign Institutional Investors (QFII) were allowed to invest with certain restrictions, including repatriation and a maximum quota (currently $100 billion) for the entire group. The advent of Stock Connect through the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) in 2014 greatly expanded the ability of international investors to access local shares

Despite being the world’s second-largest economy, China still accounts for less than 5% of the global equity benchmarks (see Exhibit). The weights of China A-shares will undoubtedly rise significantly in the coming years as the benchmarks adjust to the capitalization implicit in this market. In addition, China’s ongoing market reforms are designed to increase foreign investment going forward.


China: An Economic Giant but an Index Pygmy

As of 30 June 2019 a MSCI All Country World Index Weight Source: Lazard, MSCI

China A-Share Market

The China A-share market contains more than 3,500 stocks. It is well diversified across sectors and industries, offering exposure to companies that can only be obtained in this market. In contrast, most institutional investment has been confined to China H-shares and depository receipts, which are traded offshore.

The composition of the H-share universe is heavily skewed to the communication services and financials sectors. There is also considerable stock-specific concentration. Alibaba (14%) and Tencent (15%) together make up nearly 30% of the current MSCI China benchmark. Opening up the additional SSE and SZSE universes to investors greatly raises the number of securities available for purchase and increases the diversity of the universe. By moving beyond China H-shares, the investor can gain meaningful exposure to the consumer staples, technology, and industrials sectors, areas that, in our view, should profit from continued Chinese economic growth.

China A-Shares: A Strategic Allocation

The China A-share market and its long-term investment potential should attract the attention of any global investor. Whether investors allocate separately to this market or wait for rising index inclusion, China A-shares should not be ignored. Given the country’s economic prominence and global scale, we would argue that investors should consider a long-term, distinct allocation to the market. The market is prone to less efficiency and greater valuation extremes. A dedicated exposure will help take advantage of the current opportunity set and, with a disciplined rebalancing methodology, capture the ongoing mispricing opportunities that may occur.

The preceding is an excerpt from China A-shares: An Opportunity in Strategic Exposure. Read the full paper to learn more about what the China A-share market can offer global investors.

This document reflects the views of Lazard Asset Management LLC or its affiliates ("Lazard”) based upon information believed to be reliable as of 30 September 2019. There is no guarantee that any forecast or opinion will be realized. This document is provided by Lazard Asset Management LLC or its affiliates ("Lazard”) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance does not guarantee future results. The views expressed herein are subject to change, and may differ from the views of other Lazard investment professionals.

Certain information included herein is derived by Lazard in part from an MSCI index or indices (the "Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom.

Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.

© Lazard Asset Management

More Factor-Based Investing Topics >