The excitement that drove China’s H-shares equity markets up 30% over March 2015 is to be welcomed, but the price discrepancies many people leapt on will dry up fast.
In a market commentary, Zhu said the solid performance of the H-shares market, which has pulled back slightly this month, indicates the success of the so-called ‘through train’ Stock Connect and other internationalisation measures in China.
Zhu said an eventual convergence of the two markets is coming, which is a positive. However, those who expect a continuation of the rampant gains seen recently will have to reign in their enthusiasm.
‘The path to convergence brings abundant opportunities, but be selective. What are the differences between the two markets that may eventually disappear? Both prices and liquidity in our view,’ Zhu said.
‘The market has been focusing on the price discrepancies, with the A-H dual listed stocks seeing their premiums contract meaningfully in the past weeks. For some stocks and sectors, the move is warranted, but for some others, H-share valuations have now moved to levels that look excessive vs their (non A-share) regional and global peers.’
Zhu said this discount-focused investing will evaporate and that is where true stockpickers will have to uncover the strongest stocks on fundamental basis rather than adopting a top-down view.
‘We prefer to be more selective and focus on those where we think valuations are still attractive on an absolute basis and relative to regional and global peers - rather than buying on the basis of valuation relative to A-shares only. Some of these opportunities may lie in the less obvious areas e.g. not the A-H dual listed space necessarily.
‘Some H-share sectors where we still see good value even after the recent run-up include mid cap banks, property, utilities/new energy; while areas like construction, capital goods, transport and energy have moved to less attractive valuations largely due to the A-H price gap issue.
‘We would be selective and continuously flexible looking forward, in terms of sector picking and choosing between A and H share investment opportunities.’
The BGF China fund returned 40% in US dollar terms over the past three years. This is while its Citywire-assigned benchmark, the MSCI China 10-40 TR, rose 39% over the same period.