China A-shares a lure for investors

China’s equities markets represent an important opportunity for Australian investors as they are underrepresented in portfolios relative to its global economic impact.  China’s economic growth easily outstrips that of developed countries and the economy is being actively managed for growth.

China’s stock market, which is already huge, will benefit from the economic momentum in that nation. China's US$7.60 trillion equity market trails only the US at US$28.39 trillion, and is bigger than the combined markets of the UK and Germany, US$5.96 trillion (source: Bloomberg)

The good news for investors is that China mainland stocks, A-shares, are undervalued by historical standards against other global indices and H-shares (Hong Kong listed).  Currently the P/E of the China A-share CSI 300 Index is 15.9 compared to the P/E of the H-share MSCI China index which is 16.7.  Elsewhere, the US’s S&P 500 index and the UK’s FTSE 100 index are trading at P/E ratios above 21 times (source: Factset, as at 29 September 2017).

Platinum’s Kerr Nielson bets big on China

According to a recent Australian Financial Review article, Platinum Asset Management CEO Kerr Neilson's big bet on China, Platinum has over a quarter of its money in China-related stocks and has four times more money invested in China than in the US.

"China is very much like the '60s and '70s in America when it had a can-do attitude and there was a lot of money going into investments and they led the world in many industries," Mr Neilson said.

Lure of China A-shares

China A-shares represent the largest and most liquid shares listed on mainland China’s two main stock exchanges, Shanghai and Shenzhen, yet they are underrepresented in most portfolios.

Until recently, these shares have only been available for purchase by mainland Chinese citizens. But as the Chinese government has lifted foreign investment restrictions, select foreign institutions, including VanEck, have been licensed to invest directly in China A-shares.

A-shares v H-shares: the differences

The chart above highlights the outperformance by A-shares over H-shares, as measured by the benchmark FTSE China 50 and the broader MSCI Emerging Markets Index.

China A-shares are different from China H-shares. While A-shares are issued in China under Chinese law and are only quoted domestically in Chinese yuan, China H-shares are Chinese stocks listed in Hong Kong and quoted in Hong Kong dollars. H-shares have been much more accessible to foreign investors.

China H-shares, however, don’t represent the Chinese economy as broadly as A-shares; the biggest and most important companies in China are listed on the Shanghai and Shenzhen exchanges. Only some are listed in Hong Kong. While many managed funds provide exposure to H-shares, few provide access to China A-shares like CETF.

MSCI index inclusion driving demand for A-shares

In June, the world’s largest index provider, MSCI confirmed that it is adding China A-shares into its emerging markets and all country indices.  MSCI announced that China A-shares will make up approximately 0.73% of its emerging markets index in June 2018, at a 5% partial inclusion factor, increasing over time.  This creates an opportunity for savvy investors.

The way many large investors construct their portfolios is to hold positions similar to recognised indices, such as MSCI’s, otherwise they are taking a big risk. If markets go against them and they drastically underperform the index, they will be seen as incompetent. Better to be just above or just below the index.

Putting two and two together, the previous difficulty in getting hold of China A-shares and their exclusion from indices despite the market's size, means A-shares are underrepresented in worldwide indices and portfolios.  Indices will increase their weightings to China A-shares to be more representative of the Chinese market’s size and investors will follow.

VanEck Vectors ChinaAMC CSI 300 ETF (CETF)

CETF is a portfolio of the 300 largest and most liquid China A-share stocks listed on the Shenzhen or Shanghai Stock Exchange.  CETF is the only A-shares ETF in Australia and it enables Australian investors to access this asset class in a single trade on ASX.

^{IMPORTANT NOTICE: Issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’). VanEck is a wholly owned subsidiary of Van Eck Associates Corporation based in New York, United States. VanEck Vectors ETF Trust ARBN 604 339 808 (the ‘Trust’) is the issuer of shares in the VanEck Vectors ChinaAMC CSI 300 ETF (‘US Fund’). The Trust and the US Fund are regulated by US laws which differ from Australian laws. Trading in the US Fund’s shares on ASX will be settled by CHESS Depositary Interests (‘CDIs’) which are also issued by the Trust. The Trust is organised in the State of Delaware, US. Liability of investors is limited. VanEck Associates serves as the investment adviser to the US Fund. VanEck, on behalf of the Trust, is the authorised intermediary for the offering of CDIs over the US Fund’s shares and issuer in respect of the CDIs and corresponding Fund’s shares traded on ASX.}

^{This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and tax regulations.  Before making an investment decision in relation to the US Fund you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available atwww.vaneck.com.au or by calling 1300 68 38 37.}

^{Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies or the Trust gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the US Fund.}

^{CETF is subject to elevated risks associated with investments in Chinese securities, including A-shares, which include, among others, political and economic instability, inflation, confiscatory taxation, nationalisation, and expropriation, market volatility, less reliable financial information, differences in accounting, auditing, and financial standards  and requirements,  and uncertainty  of implementation  of Chinese law. In addition, CETF is also subject to liquidity and valuation risks, currency risk, non-diversification risk and other risks associated with foreign and emerging markets investments. See the PDS for more information on risks.}

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