Investors eye A shares as mood brightens
Both domestic and global funds set to buy more, attracted by low valuations
As uncertainties that have been shrouding the A-share market over the past few months start to subside, domestic and international financial institutions are preparing to increase their positions in China-related assets, which are currently undervalued, said experts.
Bloomberg reported on Monday that New York-based investment bank Goldman Sachs suggested to its clients they should buy call options on the Hang Seng China Enterprises Index. "Sentiment on China-exposed assets," Goldman Sachs told its clients, "has remained subdued this year and did not mirror the risk appetite rebound during the summer."
Strategists led by Christian Mueller-Glissmann explained in a note on Monday that the volatility of the HSCEI Index is less versus that of the S&P 500 Index, more so now than in the past, although the options market is portending swings in the near term for China-related assets.
The HSCEI Index has dropped 31 percent so far this year compared to a 23 percent fall in the S&P 500 Index.
At present, Goldman Sachs is overall underweight in equities in its cross-asset allocation but remains overweight on China in Asia. The bank prefers China's A shares over offshore equities as the former are comparatively less exposed to global macro headwinds, wrote the GS strategists.
Holding a similar positive outlook on Chinese equities are Citi strategists led by Robert Buckland, who had upgraded Chinese stocks to overweight in the half-year forecast released in July. Earlier this month, they reiterated that China will become an outperforming equities market amid deteriorating global economic outlook.
Salman Ahmed, global head of macro for Fidelity International, said that A-share companies' profitability is expected to improve in the fourth quarter as economic growth further recovers and commodity prices decline. Market sentiment will also pick up, he said.
In addition, 21 Chinese domestic asset management firms announced they had begun buying equity-focused products since Monday. Their announcements were unanimous in confidence in the sound and stable development of the Chinese capital market in the long run.
The A-share market's low valuation at present is another major reason prompting asset management firms' latest moves. Experts from Zhong Ou Asset Management Co, which announced on Monday a minimum 50 million yuan ($6.9 million) purchase plan, said the valuation of CSI 300 index, a benchmark of 300 A-share large-caps, has approached the low level reached in early 2016 and later in 2018.
Public companies are taking similar actions. Some 1,100 A-share companies have conducted 1,510 repurchases till Saturday this year, according to China International Capital Corp Ltd. The value of these repurchases reached 158.9 billion yuan, up 85 percent year-on-year and a record high.
The China Securities Regulatory Commission, the country's top securities watchdog, announced on Friday it will revise the repurchase regulations for A-share companies, mainly aiming to optimize and relax the current repurchase measures.
Yang Delong, chief economist from First Seafront Fund, said the benchmark Shanghai Composite Index once fell below the 3000 psychological level on Oct 10. A large number of quality companies have thus shown investment value after the latest slump, attracting large capital inflows in the following days.
The stock purchase plans announced by asset managers and listed companies show their confidence in China's economic stability and growth, as well as their positive outlook on A-share companies' profitability, he said.
Although the SCI slid 1.19 percent on Wednesday, analysts from Guosheng Securities said the fall is normal given the current market volatility. They said they believed the A-share market may have already touched the bottom, in terms of valuation and investment sentiment, on Oct 10. Therefore, a positive outlook can be held for the fourth quarter and a rebound can be expected, they said.
