There are roughly two major types of funds in the stock market. One is controlled by professional investors, namely active funds that make investment decisions after analyzing macro factors and company fundamentals.
The other type refers to funds coming from the average Joe, from retail investors who do not have in-depth financial knowledge. The majority of such funds enter the stock market through passively managed index funds.
The recent rebound of A shares was mainly triggered by FTSE Russell’s decision to include them in key indices.
FTSE announced last month that China-listed shares will comprise about 5.5 percent of the FTSE Emerging Index. The shares will be included in stages from June next year.
Meanwhile, another global index provider, MSCI, said it will consider raising the weighting of Chinese big caps in its global benchmarks next year. This has fueled expectations of future fund inflows and more mainland stocks to be included in mainstream global benchmarks.
Nonetheless, in my opinion, if A shares are attractive enough, professional investors, or the so-called smart money, would enter the market any way, with or without index providers leading the way.
In fact, other than their inclusion in global indexes and relatively low valuation, A sharesoffer no particular highlights. For long-term investors, what they care most is whether companies can create value. I don’t see much of that among A shares.
The era of loose monetary policy is coming to an end. Therefore, divergent performances are set to become the new norm as different assets compete for limited funds.
So far I don’t see mainland stocks offering any catalyst to support a sustained uptrend.
This article appeared in the Hong Kong Economic Journal on Oct 2
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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