Australian funds management research business Zenith Investment Partners believes the inclusion of China A-Shares in the major MSCI sharemarket indices is increasing growth options for professional investors.
China’s ‘A -Shares’ are shares listed on the Shanghai and Shenzen exchanges. For years, these sharemarkets have been somewhat difficult for Australian investors to get exposure to.
In a note to clients, Zenith investment analyst Thushani De Silva says the the gradual introduction of China’s largest shares into major indices will increase exposure to key market segments.
“As more China A-Shares are introduced, the composition of the emerging market index will change with increased exposure to sectors such as financials, industrials and real estate,” De Silva said.
“This will give rise to more opportunities for active managers to diversify their portfolios and enhance performance outcomes.”
But it’s not only active fund managers who will benefit from this transition. In 2015, Vanguard was the first passive index fund ETF provider to offer investors exposure to A-shares. State Street (SPDR) and Blackrock (iShares) have also shown an interest in the sector.
For investors, the issue is whether or not the inclusion of A-shares in a portfolio adds too much risk. According to Zenith research, volatility in China’s CSI 300 index was more than double (25% p.a.) of the broader MSCI Emerging Markets Index (10% p.a.).
According to Bloomberg analysis, it’s estimated 80% of A-shares trading is undertaken by retail investors, who have a shorter time horizon.
Zenith notes that the composition of share ownership and trading may explain the heightened volatility.
However, with more passive ETFs expected to enter the market, the volatility may begin to dampen gradually over time.
In the meantime, De Silva concludes that active investing may be in favour throughout the Chinese market.
“We consider the integration of A-Shares into mainstream indices to be beneficial for our rated active fund managers.”