A Forward-Looking View of China A shares Amid Economic Transition

A Forward-Looking View of China A shares Amid Economic Transition

Kevin Chen (Head of Investments, Invesco Great Wall), Weilun Soon (Thought Leadership Manager, Invesco), Chris Liu (Senior Portfolio Manager, Invesco) and Yingying Su (Client Portfolio Manager, Invesco Great Wall) are also co-authors of the article.

China has been embarking on reforms to sharpen the competitiveness of its private sector, causing China’s corporate landscape to change rapidly. Yet the COVID-19 outbreak and latest geopolitical disruptions are hastening these shifts. Understanding implications brought about by these shifts is crucial for Chinese equity investors.

Historically, the China A-share market has offered a rich source of alpha based on average active manager performance. However, equity investors have been frequently disappointed by the market’s beta performance. This is largely due to the huge market volatility linked to the large presence of retail investors, market micro mechanism such as limited ability to hedge and short as well as the closed nature of the capital market.

As China’s economic transformation accelerates and its capital market continues to open up, the nature of the beta that China brings may again evolve. How should equity investors think about their China strategy amid the changing landscape? Which macro secular trends are the ones likely to sustain China’s economic transformation, and how could investors position their portfolios to tap into these shifts?