In the next five to ten years, foreign investment in A shares is expected to reach 10%, truly becoming a new force in the Chinese stock market that cannot be ignored.
Editor’s note: This article is from WeChat public account “Economic Observer” (ID: eeo-com- Cn), author Zheng Yizhen.
In the next five to ten years, foreign investment in A shares is expected to reach 10%, truly becoming a new force in the Chinese stock market that cannot be ignored.
If the “European stock god” Anthony Burton can enter the Chinese market in the next few years, perhaps his investment strategy will not be swayed by the “immature market”. After a generation of stock gods can not compete with the entire market, and after Anthony Bolton’s withdrawal from the Chinese market six years, foreign capital gathered in A shares is participating in a structural change in the Chinese stock market.
After 4 am on September 7, the S&P Dow Jones Indices announced the inclusion of a specific list of A shares. The list came into effect on September 23, with more than a thousand A-shares included in the six major index families of S&P Dow Jones. The market is holding its breath on September 23. On the same day, FTSE Russell also increased the A-share factor from 5% to 15%. The two international indices are expected to bring more than US$5 billion in incremental funds to A-shares. At that time, A shares will be officially included in the three major index companies in the world – MSCI (Alum), FTSE Russell and S&P Dow Jones. The size of foreign investment brought by the three major indexes this year is expected to reach 100 billion yuan.
At the moment, every expansion of the A-share international index has touched the nerves of the market. Not long ago, the MSCI expansion on August 27th brought about tens of billions of capital inflows to A shares in the last three minutes. The rare “pulse market” made the market look at the big moves of foreign capital.
In the A-share market, foreign stocks have quickly caught up with public offerings and insurance funds, approaching the three-pronged trend, and are expected to raise funds at the end of this year. In 2014, Shanghai-Hong Kong Stock Connect was opened, and in 2016, Shenzhen-Hong Kong Stock Connect was opened. Since the A-shares were incorporated into MSCI in 2018, foreign capital has swarmed in at an unprecedented scale and speed. In the first half of 2019, the net inflow of A-shares to the north reached 149.6 billion yuan, and A-shares were included in FTSE Russell and S&P Dow Jones. The size of foreign-funded A-shares has soared from around 300 billion in 2013 to 1.65 trillion in the middle of this year, becoming the most important source of incremental A-share funds in recent years. As of the end of June, the public fund held a stock market value of 2 trillion yuan, the difference between the two is only more than 350 billion yuan.
Fortunately for Anthony Bolton, for the current foreign institutional investors, they are ushering in a new wave of opening up to the Chinese financial industry. Including expanding the Shanghai-Shenzhen-Hong Kong Stock Exchange quota, researching and expanding QFII and RQFII access conditions and investment scope, and discussionA series of open policies, such as the issue of relaxing the upper limit of the proportion of foreign-invested A-shares, were intensively introduced and continued to increase. On the occasion of the A-share market ushered in the “Golden September, Silver 10” market, the State Council Financial Stability Development Committee will once again set up A-shares, and must cultivate various institutional investors in a solid manner, create favorable conditions for more long-term funds to continue to enter the market, build a good market ecology, and enhance The vitality, resilience and service capabilities of the capital market make it a “booster” for promoting high-quality economic development.
In the next five to ten years, foreign investment in A shares is expected to reach 10%, truly becoming a new force in the Chinese stock market that cannot be ignored. Standing at this moment, the A-share market has seen styles and trends that have never appeared before—for example, large-cap stocks continue to outperform small-cap stocks for three consecutive years, the proportion of retail stocks continues to decline, and transactions are increasingly concentrated. From short-term speculation to long-term investment, the path of Chinese investors’ A-share asset appreciation is quietly changing.
Domestic and foreign dances
Since the end of 2015, the trend of large-cap stocks outperforming small-cap stocks has been going on for about three and a half years, the longest record since 2005. Comparing the Korean and Taiwan stock markets, since MSCI fully incorporated them, large-cap stocks continued to outperform, and there was almost no significant style switching.
This shift is unpredictable for domestic investors. An analyst from a large brokerage in Beijing remembers that when he went to a fund company in Shanghai to do a roadshow in 2015, he mentioned that a stock of TMT stocks had come to an end. The fund manager was refuted by the fund manager that “there is no imagination, it can rise another 10 times”. .
And now, LeTV, Storm Video and other GEM stars have fallen, and the blue-chip stocks have become the market’s sweetheart. Consistent with this trend, after the opening of Shanghai-Shenzhen-Hong Kong Stock Connect in 2014, foreign capital continued to grab large-cap blue-chips, especially for large consumer stocks, which was unremarkable for the technology and computer sectors that many domestic institutional investors are keen on.
In the recent expansion of A-shares MSCI and FTSE Russell, and the inclusion of the S&P Dow Jones Index, on September 6, the Shanghai Stock Connect traded a net purchase of 5.5 billion yuan. As of September 6, Shanghai Stock Connect A net purchase has been made for the 7th consecutive trading day. The foreign capital inflows are expected to rise and fall, and A shares also ushered in the “Golden September and Silver 10” market. Since September 2, the A shares have risen five times. The Shanghai Composite Index once stood at 3,000 points, and the GEM index once broke through 1700 points. On the evening of September 6, the central bank lowered its quota and decided to cut the deposit reserve ratio of financial institutions by 0.5 percentage points (excluding financial companies, financial leasing companies and auto finance companies) on September 16, 2019. It is expected to release 900 billion yuan. The market’s profit-making effect is further highlighted.
Financing with the three major index companies into A shares is divided into active funds and passive funds. After the completion of the first phase of FTSE Russell (ie, in March next year, the inclusion factor is 25%), China A shares are expectedThe weight in the FTSE Emerging Markets Index is about 5.36%, which alone means that the index will generate $10 billion in passive management of net asset inflows. FTSE Russell said that this is purely passive management of funds, and we cannot predict the active management of funds.
Similarly, a large part of institutional investors tracking MSCI are long-term funds such as sovereign wealth funds, insurance funds, and social security funds, with configuration requirements of 3-5 years or even longer. Its investment philosophy is not the same as that of A-shares. For example, there will be investments in ESG (ie, environmental, social, and corporate governance) topics. Some investors will passively track the index, while others will deviate from the benchmark. Larger, it also brings a more diversified investment strategy to the A-share market. Overseas institutional investors attach great importance to comparison with benchmarks, and domestic active funds may be more concerned about indicators such as performance rankings.
On August 27th, the proportion of A-shares increased from 10% to 15%. After the MSCI semi-annual index review in November, the A-share large-cap stocks will be further increased to 20%, while the mid-cap stocks will be 20%. % included. According to MSCI, there were $80 billion in A-shares last year. According to MSCI estimates, the emerging market index and global market index have global tracking funds of $1.6 trillion and $3.2 trillion, respectively. In 2014, Shanghai-Hong Kong Stock Connect was opened. In 2016, Shenzhen-Hong Kong Stock Connect was opened. In 2018, A-shares were included in MSCI. In 2019, A-shares were included in FTSE Russell and S&P Dow Jones.
This part of foreign investment style is increasingly affecting the A-share market. Zhou Hao, a senior economist at the German Commercial Bank, believes that foreign investment looks longer and the investment cycle for investment managers is relatively long. In the process of communicating with foreign investors, the idea of foreign capital will be found to be relatively simple – to invest in stocks in other markets that are not available in other markets. Foreign investors’ views on valuation are also very simple. They are based on three sheets of financial statements, showing cash flow and expected cash flow. For example, foreign institutional investors will make some assumptions based on financial reports, meet regularly to discuss whether the assumptions are reasonable, and repeatedly argue that they are more cautious. The number of newly added investment stocks in a year is also very limited.
The foreign capital tracking index mainly enters A shares through Shanghai and Shenzhen Port. According to Hou Anyang, the chairman of Shanrui Water in the private equity fund, the Shanghai-Shenzhen-Hong Kong Stock Connect fund is like a performance-driven company, and prefers China’s own industrial advantages, such as large consumer and new energy vehicles represented by home appliances. . “This wave of foreigners’ stocks are good targets, all of which are ROE (return on net assets) or relatively stable cash flow.”
It is also a large consumer sector, and the valuation system of foreign capital is significantly different from domestic capital. Guosheng Securities analyst Zhang Qizhen explained, for example, why we look at Coca-Cola’s valuation is more expensive than Apple. In the foreigner’s valuation system, Coca-Cola has existed for more than 100 years, but technology companies like Apple, even like Nokia only existed. If