Many commentators have linked China’s underperforming stock markets to recent data indicating slowing economic growth. For example, the Purchasing Managers’ Index hit a six and a half year low of 47.2 in September.
But weakness in the country’s economic performance doesn’t necessarily mean the stock market will be influenced. According to historical data, the correlation between the mainland stock market and the economy’s short-term and medium-term performance is relatively low.
There were several times when the stock market was bullish amid a sluggish economy.
Investors should know that the economy’s deceleration comes after decades of rapid growth. It is inevitable. Even the International Monetary Fund pointed out that transformation will make China’s economic growth more sustainable.
As China’s influence grows, the A-share market gains more importance as well.
Five years ago, the weight of Chinese companies in MSCI’s emerging market index was about 17 percent. Now, it’s 21 percent.
The much-anticipated inclusion of A shares in the MSCI index will further attract international capital into China and improve the behavior of the market, which is currently dominated by retail investors.
I believe that A shares will become a key part of the fund manager’s investment portfolio.
The government’s reforms, especially in state-owned enterprises, are major engines that will drive the A-share market.
Share prices of stocks related to the One Belt, One Road initiative have risen significantly. Related railway, airline and transport stocks have climbed 40 to 50 percent from their levels at the start of the year.
As reforms go deeper, investors should not miss the trend.
This article appeared in Hong Kong Economic Journal on Oct. 16.
Translation by Myssie You
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