Foreign Investors' A-Share Holdings Top CNY1 Trillion for First Time as Value Investing Gains Traction
Zhou Ailin
/SOURCE : Yicai
Foreign Investors' A-Share Holdings Top CNY1 Trillion for First Time as Value Investing Gains Traction

(Yicai Global) Nov. 13 -- International investors' holdings in China's A-share stocks have reached CNY1.021 trillion (USD153.56 billion), passing the trillion milestone for the first time, data from the People's Bank of China shows. Given tightening financial regulation and an increase in foreign investors, the number is only set to keep on rising, institutions forecast.

"The US market always draws a distinction between value and growth stocks. For example, they have the Standard & Poor's 1000 value and growth indexes," Shen Yi, chief investment officer at Shanghai ShenYi Investment Co. and founder of The Goldman Sachs Group Inc.'s [NYSE:GS] European exchange-traded fund division, told Yicai Global at the fourth Yixin Weiye Forum. "China rarely makes such a distinction due to fast sector rotations, but this year has really marked the start of an explosion in value investing [in China]. Nearly 100 CSI 300 blue chips stood out.

"All investors can outperform the broad market -- in the consumer goods, pharmaceutical and insurance sectors alike -- as long as they focus on return on equity or value," he added.

"Continuous increases in foreign investments in the A-share market will also reshape investment philosophies among investors," said Yang Yushan, a partner at Shanghai Milestone Asset Management Co.  "Foreign investors also value A-shares' higher return on equity. They focus primarily on firms valued at over CNY10 billion with high liquidity, and rarely speculate on small caps. Their experience in the US tells them that it's very difficult for less resourceful small firms to win out against the odds."

Valuation methods are very different in China and the US. "The biggest difference lies in the fact that the Chinese market was driving by capital in the past, where liquid stocks could be easily bid up or manipulated," Shen said. "By contrast, capital in the American market is almost inexhaustible, meaning investors can't manipulate the market using capital alone, it is driven by value. High-growth companies or those with stronger-than-expected earnings can attract an infinite amount of funding."

A rise in foreign A-share investors has seen the discovery or more and more Chinese value stocks. In particular, Hangzhou Hikvision Digital  Technology Co. [SHE:002415], one of the fastest growers this year, has seen steep increases in foreign shareholdings over the past three quarters.

"What's more, an American private equity fund allocated over 20 percent of its managed assets to Hikvision," Shen added. "The Chinese firm posted consistent earnings growth every quarter, and the fund kept increasing its shareholdings after making an initial purchase in the first quarter."

"It was easier to bid up small caps in the past, but now listed companies are required to ensure information transparency in their financial statements," he continued. "Any insider information or delay in data disclosure is prohibited, a sign that China's financial regulation is being adjusted toward international practices.

"Foreign investors are tempted by opportunities associated with the consumption and service industry upgrade in China. They believe that A-share blue chips are undervalued and will invest in these stocks," he suggested. "Valuations of leading blue chips will continue to rise next year, but their prices are already pretty high, especially those highly cyclical stocks. Having said that, blue chips will continue to rally as long as they continue to deliver better-than-expected results."

"Blue chips may also retreat if their prices rally too high, and substantial price corrections are possible amid major market adjustments," Yang Yushan warned.

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Keywords: MSCI , A-Shares , Foreign Investors , STOCK EXCHANGE