Acadian’s paper highlights China’s $4.5 trillion A-shares market as an opportunity that leading benchmark indexes are largely missing at present. Investors historically have had much greater exposure to China’s New York- and Hong Kong-listed companies, a $3.1 trillion market that boasts a number of the country’s biggest e-commerce heavyweights and financial conglomerates.
With “a massive amount of market capitalization,” relatively under-researched companies and relatively inefficient markets, gatekeepers increasingly see being underweight China’s A-shares as posing risks for institutional portfolios, noted Jack Nelson, a portfolio manager in Sydney with Stewart Investors, a $24.7 billion money manager.
If investors conclude they should have more exposure than benchmark indexes currently suggest, they should focus on adding “a material onshore component,” Acadian’s paper said. By the same logic, if investors decide to limit their exposure to China, they should first look to trim their holdings of China’s offshore listings in Hong Kong and New York.
A growing number of analysts is reaching similar conclusions.
Mercer LLC, in May 2021, called on institutional clients to dedicate 5% to 10% of their overall equity allocations to China’s A-shares market, a huge overweight compared to that market’s roughly 1% weighting now in MSCI’s All Country World index.
Niall O’Sullivan, Dublin-based chief investment officer, EMEA & Asia, investment solutions with Mercer, said that recommendation was one of several Mercer made last year to get investors to “think about where the puck is going” and consider getting ahead of those anticipated changes in global market capitalization.
The response? Clients are beginning to act, but gradually, said Mr. O’Sullivan, adding that the pace of takeup has possibly been slowed a bit by all of the “noise” of the past year, from Beijing’s far-ranging regulatory reforms to continued geopolitical tensions.
A number of asset owners see the strategic rationale for adding a dedicated China allocation but they’re not quite ready to make that jump, said Phillip Nelson, a partner and director of asset allocation with the Boston-based investment consulting firm NEPC LLC.
Last year’s regulatory-inspired sell-off, meanwhile, has diminished the urgency of doing so for now, he said.
Whether investors see China in terms of opportunities or threats for their portfolio returns, the desire to have the levers needed to respond should eventually add momentum for moves to establish dedicated Chinese equity exposures, analysts say.
Asset owners who would have been happy to leave decisions on China allocations to their emerging markets or global equity managers in the past are beginning to say “well, actually, maybe we should have direct allocations to China, and … a bit more granularity inside the portfolio,” Mercer’s Mr. O’Sullivan said.
Another factor standing in the way of bigger allocations to China now could be continued COVID-related travel …….