Spotlight series: 5 principles for a successful China investment strategy

#2 China’s retail investors trade A-shares frequently, creating high liquidity and pricing discrepancies

21/09/2020
#2 China’s retail investors trade A-shares frequently, creating high liquidity and pricing discrepancies
A-shares are easy to buy and sell, and provide fertile ground for stock-picking

This market tends to be driven by local retail investors who trade frequently and generally have a short-term outlook. That makes A-share annual market turnover (the total value of stocks traded in a year) among the highest in the world, which provides two key benefits:

  • It’s a highly liquid market, so it’s generally easy to buy and sell shares.
  • The volume of trading done by retail investors can cause entire sectors to rotate in and out of favour, and cause individual stock prices to diverge significantly from their underlying long-term fundamentals. This allows stock-pickers to use in-depth research to uncover and exploit pricing discrepancies.
A-shares experience significant sector rotation, which can have unintended consequences if not carefully constrained

Performance of sectors within MSCI China A Onshore Index by calendar year

Chart: A-shares experience significant sector rotation, which can have unintended consequences if not carefully constrained

Source: Allianz Global Investors. Data as at 30 June 2020. Investment involves risks. Past performance is not indicative of future performance. Individual performance will vary.

Focus on stock selection rather than rely on large market swings

One persistent feature of the retail-driven A-share markets is a high degree of sector rotation: investors move frequently from one sector and into another, sometimes in anticipation of economic news but also to seize upon momentum. In this environment, it may help to focus on individual stock selection, rather than over- or underweight sectors vs their benchmarks. That can help make sure performance is driven more by fundamental factors that can be managed more easily (such as the ability to choose stocks) rather than those that can’t be controlled (such as large swings in sector performance).

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Spotlight series: 5 principles for a successful China investment strategy

#1 Foreign investors have multiple entry points into China's equity markets

21/09/2020
#1 Foreign investors have multiple entry points to China's equity markets
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