23 October 2016
China's A-share markets have a good chance of posting further gains in the second half of this year. Photo: HKEJ
China's A-share markets have a good chance of posting further gains in the second half of this year. Photo: HKEJ

Why the A-share market may not have peaked yet

Will China’s A-shares be included into the MSCI Emerging Markets Index in June? If not, when?

These thoughts are on investors’ minds as they search for clues to determine the market’s prospects and whether they should prepare for an extension of the current rally into June.

As for me, I believe the inclusion of A-shares into the benchmark may not happen in June, as MSIC board is very cautious.

Currently, there is only Shanghai-Hong Kong Stock Connect, while the stock link with Shenzhen is still under way. The MSCI board might wait until the Shenzhen link actually becomes a reality.

If the stock link with Shenzhen comes on stream in August, the MSCI board could announce the A-share inclusion in its September meeting. Senior executives of the index provider have, in fact, already hinted that a decision might not be made in June, and that they will wait until September.

Meanwhile, the FTSE index may also announce the inclusion of A-shares into its Emerging Markets Index either this coming September or next year.

A-shares are expected to account for 25 percent of the MSCI Emerging Markets Index. However, China market only represents around 20 percent of the portfolio of foreign emerging markets funds on average.

If all A-shares join the benchmark, China will then take up more than 40 percent of the index. That would lure in massive amount of foreign investors into A-shares. The Shanghai-Hong Kong Stock Connect still has daily and overall quota restrictions right now, which might be removed sooner or later.

Some smart foreign money, for instance, has already bought 28 percent of Shanghai International Airport (600009.CN), exceeding the limit of 26 percent for foreign ownership. Purchases in the stock have been suspended until the foreign shareholding drops below 26 percent.

Given the supporting factors, A-shares are poised to jump further in the second half, with the index possibly testing the peak of 5,500 and 6,000 points.

There is an old saying “sell in May and go away”. But nobody says “buy in May and hold”, which seemed to work very well for the first 20 days of May.

Should investors buy more? If not, could they miss the last chance to enter the market?

If the Shenzhen stock link and inclusion of A-shares into MSCI index both come true in June, this month could become the last chance for market entry.

And the market might surge further in June if the Legislative Council prepares to pass the political reform bill. Though things remain unpredictable at the moment, there could be a “white swan” effect.

As for the situation around the globe, the eurozone bond market has stabilized after the recent sell-off. And euro stocks continue to jump amid strong expectation for further monetary easing in the region.

In the US, stocks have largely traded sideways, while the nation’s monetary policy continues to support a strong greenback. Nevertheless, the timetable for a US rate hike has yet to be finalized.

Equities appear to outperform other asset classes like bonds, commodities and foreign exchange. Both European and Japanese central banks are set to launch further monetary easing, while China’s central bank is also moving to pump more liquidity into the market.

Under such market scenario, investors in US stocks should take short-term bets. Also, investors could switch to Europe, another mature market which has more upside than Wall Street after hedging the currency risk.

In addition, investors can place some bets on the China markets for high return, if they have confidence in the nation’s economic recovery.

The emerging markets index has soared 8.9 percent so far this year, bolstered by gains in China, Hong Kong, Russia and Brazil markets.

This article appeared in the Hong Kong Economic Journal on May 21.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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