Independent Thinking^®

Q&A with Matthews Asia

Editor’s note: Evercore Wealth Management supplements its core investment capabilities with carefully selected outside funds across the range of the firm’s asset classes. Here we discuss the prospects for investors in China with Matthews Asia investment strategist Andy Rothman.^* Please note that this represents the views of Matthews Asia and not necessarily the views of Evercore Wealth Management.
 
Q: Is MSCI’s recent decision to include China A-shares in the MSCI Emerging Markets Index a positive development?
 
A: Yes, MSCI’s decision to add mainland Chinese shares to its benchmark index is encouraging. China has been further opening its capital markets over the past four years. In our opinion, China’s A-shares market is too big to be overlooked by global investors. It is the world’s second-largest equity market in terms of both market capitalization and turnover. Until now, MSCI indices have been lacking in their representation of China’s overall markets.

Q: How could this decision benefit investors?
 
A: Foreign investors now can take advantage of a unique opportunity to participate directly in companies that are benefiting from being part of one of the world’s most dynamic economies. The MSCI decision allows 222 of China’s large-capitalization domestic A-share stocks to be gradually included into the Emerging Markets Index, starting in June 2018. The number of stocks represents approximately 0.73% of the weight of the MCSI Emerging Markets Index. In recent years, China’s A-shares market has evolved – in terms of both the growing number of listed companies and in overall quality. We’ve seen the overall regulatory and corporate governance environment improve, and have seen better accessibility with the “Stock Connect” programs of the Shanghai and Shenzhen stock exchanges.
 
Q: What led MSCI to include these stocks?
 
A: In recognizing China’s efforts to meet MSCI criteria and further open up capital markets, the index company said, “MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate.” It added that further inclusion of China A-shares “will be subject to a greater alignment of the China A-shares market with international market accessibility standards, the resilience of ‘Stock Connect,’ the relaxation of daily trading limits, continued progress on trading suspensions, and further loosening of restrictions on the creation of index-linked investment vehicles.”
 
Q: How old is China’s A-share market?
 
A: Started in 1992, China’s A-shares market is relatively young. Challenges still exist, and improvements need to be made. Retail investors currently dominate the overall market. Trading can be volatile and government intervention can be heavy-handed. We are encouraged, however, by the strong potential and opportunities in the A-shares market, and believe long-term investors can benefit from exposure to A-shares.
 
Q: How much experience does Matthews have with China A-shares?
 
A: Matthews Asia has extensively studied and invested in China’s domestic A-share companies for many years. In 2014, our firm was awarded a Qualified Foreign Institutional Investor, or QFII, license and quota that enabled us to invest directly into China’s domestic securities market, including the market for China A-shares. We have also participated in A-shares via the “Stock Connect” programs, which in recent years have linked the Shanghai and Shenzhen stock exchanges to the Hong Kong Stock Exchange and enabled foreign investors to buy A-shares with fewer restrictions than under the QFII schemes.
 
We are attracted by the fundamentally sound merits of many local companies listed in China. We realize, however, that many quality A-share companies in growing industries can be priced at high valuation multiples, which makes our experience of carefully vetting them critical. We believe long-term investors can benefit from exposure to A-shares. Our focus always has been on taking a fundamental approach to finding leading A-share companies poised to benefit from the country’s structural shift toward its domestic economy.
 
For more information about the Matthews Asia Fund and about other funds on the Evercore Wealth Management investment platform, please contact Stephanie Hackett at [email protected].

^*This interview has been adapted with permission from an article published in June 2017 by Matthews Asia.